US Dollar Forecast: DXY Weakens as Gold Holds Steady Ahead of Election and Fed Cut

Dollar Index Drops as Investors Hedge Pre-Election Risks, Await Fed Cut

The U.S. Dollar Index (DXY) slipped to 103.58 on Monday, its lowest in two weeks, as investors pulled back from “Trump trades” and rebalanced positions ahead of a volatile U.S. presidential election and the Federal Reserve’s likely rate cut on Thursday. This drop reflects widespread caution in forex markets, with the dollar losing ground against major currencies: the euro rose by 0.8% to $1.0914, while the yen advanced nearly 1% to 151.645. Traders remain on edge, anticipating economic shifts based on election outcomes and the Fed’s impending policy decision.

Technically, the market is straddling the 200-day moving average at 103.827. Trader reaction to this indicator will determine the near-term direction.

A sustained move over 103.827 will indicate the presence of buyers. If this creates enough upside momentum then look for a surge into 104.636 to 104.799.

A sustained move under this level could trigger an acceleration into a pivot at 103.144.

Election Polls Drive Profit-Taking

With recent polls showing a narrow lead for Democratic candidate Kamala Harris in key battleground states, traders trimmed their dollar exposure. For weeks, a Trump re-election was priced in, with expectations for inflationary policies that could support higher yields and a stronger dollar.

Betting market trends have recently shifted, with Harris priced at 53 cents to Trump’s 52 cents on PredictIt, reversing the dollar-leaning positions held earlier. Investors now anticipate a potential reshuffling in dollar-based positions post-election, driving pre-election profit-taking.

Treasury Yields Reflect Pre-Election Safety Demand

U.S. Treasury yields dropped Monday as investor appetite for safe assets grew. The 10-year Treasury yield fell by 9 basis points to 4.272%, while the 2-year yield declined by over 6 basis points to 4.137%, signaling broader market caution. Elevated demand for protective positions has also pushed option-based implied volatility on major pairs, such as the euro/dollar and dollar/yuan, to multi-month highs, underscoring the anticipated currency market shifts after the election.

Fed Rate Cut and Global Central Bank Easing Expected

A Federal Reserve rate cut of 25 basis points is widely expected on Thursday, following September’s half-point cut. Traders assign a 98% likelihood of this outcome, with CME’s FedWatch tool showing strong odds of another cut in December.

Goldman Sachs analysts forecast further rate reductions into 2025, with a target range of 3.25% to 3.5%. Additional central bank cuts are expected from the Bank of England and Riksbank this week, intensifying global monetary easing and putting downward pressure on the dollar as investors seek returns elsewhere.

Gold Holds Firm with Dollar Weakness

Gold prices stabilized at $2,739.25 an ounce, supported by dollar declines and investor caution. Traditionally a hedge during economic uncertainty, gold has gained significant ground as falling yields erode the appeal of dollar-denominated bonds. UBS analysts noted that a Trump victory might support gold prices toward $2,900, while a Harris win could trigger a temporary pullback.

Market Forecast: Bearish Bias on Dollar

With the U.S. election and Federal Reserve rate cuts likely to weigh on the dollar in the near term, traders should expect a bearish tone in the DXY. Prolonged election outcomes or dovish signals from the Fed could keep downward pressure on the dollar, while continued global easing could further boost demand for competing safe-haven currencies.