US Dollar Forecast: Gains Persist as Gold Hits One-Week High on Fed Outlook

Dollar Rebounds: Are Gains Sustainable?

The U.S. dollar regained momentum on Wednesday, recovering from a three-day slide as traders turned their focus to incoming U.S. fiscal policies under President-elect Donald Trump. The dollar index rose to 106.782, nearing last week’s one-year high of 107.064. Meanwhile, the yen weakened to 155.67 per dollar, erasing prior gains as risk sentiment improved.

Investors remain cautious ahead of detailed policy announcements, including potential fiscal spending and inflationary pressures, which could shift the Federal Reserve’s monetary stance. According to Jane Foley, Head of FX Strategy at Rabobank, markets are in a holding pattern until Trump takes office and outlines specific economic plans.

Treasury Yields: What Signals Are Emerging?

U.S. Treasury yields edged higher as traders balanced geopolitical risks and softer economic data. Housing starts in October fell below expectations, while building permits also declined. Geopolitical tensions, including Russia’s lowered threshold for nuclear strikes in response to Ukraine’s use of U.S.-made missiles, have added complexity to market sentiment.

Upcoming data, including flash PMI reports and Federal Reserve official comments, are in focus for potential policy cues. Odds of a December 25-basis-point rate cut have dropped to 59.1%, down from 82.5% a week earlier, per CME’s FedWatch Tool.

How Are Other Currencies Reacting?

Sterling briefly rose after U.K. inflation data exceeded forecasts but ended flat at $1.26775. Bank of England Governor Andrew Bailey signaled a gradual approach to rate adjustments, supporting expectations of steady policy in the near term. The euro dipped 0.3% to $1.056 as traders evaluated the European Central Bank’s next steps.

In Japan, the yen’s weakness near 155.67 raised speculation about intervention. However, the Bank of Japan has maintained a reserved stance, with Governor Kazuo Ueda refraining from significant comments on currency levels. Analysts suggest authorities may rely on verbal interventions before considering direct action.

Gold Prices: Can Bullish Sentiment Hold?

Gold prices are trading at a one-week high as the dollar pulled back from its intra-day high. While safe-haven demand stemming from Russia-Ukraine tensions is providing some support, profit-taking and a firmer dollar could provide headwinds.

Market participants are awaiting remarks from Federal Reserve officials for clarity on rate-cut expectations. While a December pause could cap short-term gains, ANZ analysts highlight that inflation risks, geopolitical uncertainty, and strong physical demand will likely sustain gold’s long-term bullish trend.

Market Outlook: Key Risks in Focus

The U.S. dollar may extend its recovery as fiscal clarity improves and the Fed signals a slower pace of rate adjustments. Treasury yields are expected to remain firm, reflecting investor caution around geopolitical tensions. Gold prices could face headwinds in the near term from dollar strength but are supported by underlying macroeconomic and geopolitical risks. Traders should stay alert to upcoming policy signals and geopolitical developments for clearer market direction.