US Dollar Forecast: Yields Drop and Gold Gains Limit Dollar’s Strength at Key Resistance

U.S. Dollar Softens as Treasury Yields Decline, Traders Eye Resistance Level

The U.S. dollar traded lower against a basket of major currencies on Thursday, as investors exercised caution approaching the key resistance level at 104.799 on the Dollar Index (DXY). Weaker Treasury yields have led some traders to book profits on long dollar positions.

If the DXY manages to break through 104.799, it would signal stronger buying momentum, with the next target being the late June high at 106.130. This week’s rally was supported by a surge through the 200-day moving average at 103.803, which now serves as the primary support level.

At 14:48 GMT, the U.S. Dollar (DXY) is trading 104.176, down 0.247 or -0.24%.

Treasury Yields Ease, Capping Dollar Strength

The yield on the 10-year Treasury slipped by 2 basis points to 4.22%, pulling back from its three-month high of 4.25% reached on Wednesday. The 2-year Treasury yield also declined, falling 3 basis points to 4.059%. This pullback follows several sessions of rising yields, as traders continue to weigh the Federal Reserve’s future rate policy.

According to Gregory Faranello of AmeriVet Securities, the bond market has a tendency to reprice quickly after getting ahead of itself. This pattern has been common in recent months as traders anticipate Fed rate cuts. Jobless claims data released Thursday showed claims at 227,000 for the week ending October 19, lower than the expected 245,000, indicating continued economic strength.

Dollar Strength Supported by Fed and Political Factors

Despite the current dip, the U.S. dollar remains strong, trading near a three-month high of 104.38. Traders are scaling back their expectations for aggressive rate cuts from the Federal Reserve, with current odds of a 50-basis-point reduction in 2024 dropping to 65%, from around 85% just a week ago.

Comments from Fed officials, including Kansas City’s Jeffrey Schmid and Philadelphia’s Patrick Harker, suggest the central bank will take a cautious, gradual approach to easing. This sentiment has supported U.S. Treasury yields, which in turn, have pressured currencies like the Japanese yen, pushing it to 152.62 against the dollar.

Political factors are also influencing the dollar’s strength. Growing market expectations of a potential second Trump presidency have buoyed the dollar, as his policies could lead to inflationary pressures through higher tariffs and fiscal spending. Meanwhile, Japan’s upcoming elections could inject further volatility, as polls indicate a potential loss of majority for the coalition government, adding to uncertainty.

Gold Steady as Dollar Strength Limits Gains

Gold prices ticked higher on Thursday as safe-haven demand countered the dollar’s firmness. Geopolitical tensions in the Middle East continue to support gold, although the stronger dollar capped any significant rally. A stronger dollar typically makes gold more expensive for foreign buyers. Analysts project gold could reach highs of $2,800 by 2025, driven by U.S. monetary policy easing and central bank purchases.

Market Forecast: Dollar Faces Key Resistance, Watch for Yield Reversals

In the short term, the U.S. dollar is likely to test resistance at 104.799. A breakout would signal further strength, pushing the DXY toward 106.130. However, traders should monitor intraday charts closely. If Treasury yields recover from today’s weakness, the dollar could strengthen further, reversing its current direction and pressuring gold prices. This scenario would likely bolster the dollar’s outlook, while adding downward pressure on safe-haven assets like gold.