US Dollar Forecast: Eurozone Resilience Limits DXY Gains After Two-Week Low

U.S. Dollar Index Stages Modest Recovery After Recent Declines

The U.S. Dollar Index (DXY) edged higher on Thursday, recovering from a two-week low of 105.85 in subdued trading conditions during the Thanksgiving holiday. The index climbed to 106.30 following its steepest decline in four months, which traders attributed to technical positioning rather than underlying shifts in economic fundamentals.

At 12:51 GMT, the U.S. Dollar Index is trading 106.249, up 0.227 or +0.21%.

Holiday Trading Limits Volatility

Trading activity remained muted due to the U.S. holiday, limiting significant market drivers. Analysts anticipate that the dollar may rebound in early December as market participants refocus on broader macroeconomic fundamentals.

Michael Brown, a senior research strategist at Pepperstone, highlighted ongoing U.S. economic resilience and persistent concerns in the eurozone as supportive factors for the dollar. Brown noted, “Wednesday’s dip below 106 seemed disconnected from fundamentals, as U.S. economic outperformance continues to dominate sentiment.”

Global Currencies React to Policy Signals

The euro stabilized after its sharp midweek gains, driven by hawkish remarks from European Central Bank board member Isabel Schnabel. Schnabel emphasized the need for gradual rate cuts, reinforcing expectations that the ECB will maintain a cautious stance. This buoyed the euro, with strategists like UOB’s Quek Ser Leang predicting further upside potential.

Meanwhile, the Japanese yen posted its strongest weekly performance in nearly three months, rallying 1.9% amid speculation that the Bank of Japan may hike rates in December. The yen slipped slightly on Thursday to 151.93 per dollar but remains on track to recover prior losses. Market pricing now indicates a 65% probability of a December rate hike by the BOJ, supporting the yen’s recent strength.

In contrast, the Australian dollar remained flat after Reserve Bank of Australia Governor Michele Bullock underscored persistently high core inflation, signaling that rate cuts are unlikely in the near term. Sterling also dipped, trading at 1.2649 against the greenback.

Emerging Market Currencies Show Resilience

The Mexican peso (MXN/USD) advanced more than 1.5% after comments from Mexico’s president on migration policies eased concerns over potential U.S. tariffs. Emerging market currencies, often sensitive to shifts in risk sentiment, exhibited relative stability despite the dollar’s rebound.

Market Outlook: Focus Shifts to December

With limited catalysts to drive significant moves in the short term, the DXY is expected to consolidate near current levels. Traders will closely monitor U.S. employment data and inflation figures in the coming weeks, which are likely to shape expectations for Federal Reserve policy in early 2024. A sustained break above the 107 level would signal renewed bullish momentum for the dollar, while support at 105.722 remains critical to avoid a deeper correction.

More Information in our Economic Calendar.