US Dollar Forecast: Euro Falls as U.S. Yields Rise and Gold Loses Momentum

Dollar Poised for Strongest Weekly Gain in a Month as Fed Signals Caution

The U.S. Dollar Index (DXY) is set for its largest weekly gain in a month, rising 1.1% to 106.98 as investors price in slower rate cuts from the Federal Reserve in 2025. The dollar’s strength has been further supported by contrasting policy moves from global central banks, including rate cuts by the European Central Bank (ECB) and the Swiss National Bank (SNB), and a potential pause from the Bank of Japan (BoJ).

At 15:40 GMT, the U.S. Dollar Index (DXY) is trading 107.035, up 0.30 or +0.03%.

Fed Rate Cuts Expected to Slow After December Meeting

Markets are overwhelmingly confident the Fed will deliver a 25-basis-point rate cut at its December 18 meeting, but the pace of further easing in 2025 remains in question. The CME FedWatch Tool indicates only a 24% chance of another cut in January, with March emerging as the likely next opportunity for policy action. U.S. producer price inflation exceeded expectations in November, rising 0.4% month-on-month, signaling sticky price pressures that could keep the Fed cautious.

Fed speakers, including San Francisco Fed President Mary Daly, have stressed the need for a measured approach to rate reductions, highlighting slower progress toward inflation targets. The 10-year Treasury yield rose to 4.35%, underpinning the dollar’s appeal as real yields remain elevated.

Euro, Pound, and Yen Struggle Against Resurgent Dollar

Diverging monetary policy has weighed heavily on major currencies. The euro fell to $1.0455, its weakest level since late November, following the ECB’s rate cut and a dovish tone on future easing. Meanwhile, the British pound dropped to $1.2630 after UK GDP contracted by 0.1% in October, surprising markets expecting growth.

The Japanese yen has fared the worst, depreciating 2% this week as reports suggest the BoJ may forgo a rate hike at its upcoming meeting. USD/JPY climbed to 153.09, its highest since November. Analysts suggest the BoJ’s decision could swing the pair, with a pause potentially driving dollar strength while a hike exceeding 15 basis points might trigger a yen rebound.

Gold Slips but Remains Up for the Week

Gold prices eased 0.4% on Friday to $2,671.39 per ounce but retained a 1% weekly gain as investors positioned ahead of the Fed meeting. The strong dollar has capped gold’s rally, though expectations of easing in 2025 could support further gains for bullion in the longer term.

Market Outlook

The dollar is likely to remain firm in the near term, with the DXY targeting resistance at 107.50. A cautious Fed, robust U.S. economic data, and policy divergence with other central banks should sustain the dollar’s momentum into year-end. However, any surprises from the BoJ or further weakening in global growth data could introduce volatility.