US Dollar Forecast: Will Bond Market Strain Trigger a Broader Dollar Pullback?

Dollar Finds Tentative Support While Treasuries Sell Off

The U.S. Dollar Index (DXY) is edging higher in Tuesday’s trade, stabilizing just above last week’s multi-year low of 99.014. The move follows a sharp sell-off last week, and while strong buying hasn’t materialized, some bottom-picking and profit-taking are helping to curb further downside. A rise in Treasury yields is lending short-term support to the greenback, but structural headwinds remain.

Dual Sell-Off: Stocks and Dollar Decline Together

In a rare market development, both the S&P 500 and the U.S. Dollar Index have dropped simultaneously over the past three months—down 7.96% and 8.99% respectively, according to SentimenTrader as reported by MarketWatch.

This correlation has occurred only eight times since 1973 and typically signals broader capital flight from U.S. assets. Historical precedent suggests that while the S&P 500 often goes on to make new lows following such episodes, the dollar has historically rebounded within a year in 75% of cases.

Yields Climb, But Confidence Remains Fragile

The 10-year Treasury yield has risen to 4.395% on Tuesday, adding pressure to the bond market and offering partial support to the dollar. While higher yields typically attract foreign capital into U.S. assets, recent moves reflect investor unease rather than optimism. Concerns over fiscal stability and rising U.S. debt levels are driving the sell-off in Treasuries, not stronger economic expectations.

BMO’s Carol Schleif notes persistent anxiety around the holdings of major foreign creditors like China, which owns roughly $760 billion in U.S. government debt. Any signs of repositioning from these players could push yields even higher and challenge the dollar’s stability. At the same time, a rise in U.S. credit default swap (CDS) spreads and increased hedge fund activity point to growing demand for liquidity. VP Bank’s Felix Brill warns that margin calls and stress events tied to the Treasury market could add to volatility, further complicating the dollar’s outlook.

Policy Uncertainty Pressures Dollar Outlook

Ongoing tariff uncertainty is further complicating the dollar’s path. Inflationary pressures from elevated tariffs—now averaging around 25%—are creating a Fed dilemma. Policymakers must weigh the need to cut rates to support growth against the risk of fueling inflation.

Atlanta Fed President Raphael Bostic forecasts GDP growth slowing to just over 1%, while Governor Waller sees inflation from tariffs as temporary. Upcoming U.S.-Japan trade talks add another variable, with any resolution potentially influencing currency markets.

Market Forecast: Short-Term Caution, Medium-Term Recovery Potential

The DXY faces a complex backdrop of rising yields, fiscal concerns, and trade uncertainty. While the dollar may remain under pressure in the near term, historical behavior suggests recovery potential as investors recalibrate.

Key to the outlook will be developments in Treasury markets, Fed policy signaling, and tariff negotiations. Traders should focus on building resilience across positions, hedging short-term downside while staying alert for signs of a medium-term dollar rebound.

More Information in our Economic Calendar.