US Dollar Forecast: Fed Rate Cut Bets Cap DXY Strength Ahead of Meeting Minutes

U.S. Dollar Holds Gains as Traders Weigh Fed Outlook and Tariff Uncertainty

The U.S. Dollar Index (DXY) is edging higher on Tuesday, holding above last week’s multi-month low of 106.566. Traders are assessing recent weak U.S. economic data, geopolitical developments, and the outlook for Federal Reserve policy, all of which are shaping short-term sentiment in the currency markets.

A stronger yen, supported by upbeat Japanese GDP data, and steady performances from the Australian and New Zealand dollars are keeping broader dollar momentum in check. Meanwhile, expectations for further Fed rate cuts this year remain a key focus, with markets closely watching upcoming meeting minutes for additional clarity.

At 15:24 GMT, the U.S. Dollar Index is trading 106.926, up 0.186 or +0.17%.

Yen Strengthens on GDP Beat, But Dollar Retains Ground

The yen gained 0.27% to 151.94 per dollar, reversing earlier losses after Monday’s data showed Japan’s economy expanded faster than expected in the fourth quarter. This reinforces expectations that the Bank of Japan (BOJ) could tighten policy more aggressively than initially anticipated, with traders now pricing in 35 basis points of additional rate hikes by December.

Despite this, the dollar remains resilient, as investors digest last week’s weaker U.S. retail sales data and a delay in the implementation of Donald Trump’s proposed reciprocal tariffs. The geopolitical landscape is also in focus, with discussions set to begin in Saudi Arabia on resolving the Russia-Ukraine conflict, lending some support to the euro, which hovers around $1.0487.

Treasury Yields Tick Higher as Fed Meeting Minutes Loom

U.S. Treasury yields are rising after Monday’s holiday, with the 10-year yield up 3.7 basis points to 4.515% and the 2-year yield climbing above 4.28%. A bond selloff in Europe, driven by expectations of increased defense spending, has contributed to the upward movement.

Investors are now awaiting the release of the Federal Reserve’s January meeting minutes on Wednesday, looking for signals on how long policymakers intend to keep rates elevated. While Chair Jerome Powell has emphasized a cautious approach to rate cuts, market pricing suggests minimal chances of any cuts in March, with only one or two reductions expected by the end of 2025.

Australian Dollar Holds Steady After RBA’s ‘Hawkish’ Rate Cut

The Australian dollar remains firm near two-month highs at $0.6357 following the Reserve Bank of Australia’s (RBA) first rate cut in over four years. Despite the 25-basis-point reduction to 4.10%, the central bank signaled caution regarding further easing, leaving traders uncertain about the pace of additional cuts.

Swaps indicate only a 20% probability of another cut in April, though expectations for a move in May remain high. This cautious stance has helped the Aussie maintain recent gains, reflecting broader market uncertainty over global monetary easing cycles.

Market Outlook: Dollar Faces Resistance, but Support Holds

The U.S. Dollar Index is currently at 106.99, attempting to build support after last week’s 1.2% decline. While renewed optimism over a potential easing of tariff risks and softer U.S. economic data have weighed on the greenback, the Fed’s reluctance to accelerate rate cuts provides underlying strength.

If upcoming economic releases continue to show softening U.S. data, traders may increase bets on rate cuts, potentially limiting further dollar upside. However, any signs of persistent inflation or stronger-than-expected economic resilience could help DXY stabilize above the 106.50 level in the near term.

More Information in our Economic Calendar.