US Dollar Outlook: Fed’s Stance Weighs on Euro and Gold Prices

The U.S. dollar strengthened on Monday, recovering from Friday’s inflation-driven pullback, as diverging monetary policy paths between the Federal Reserve and global central banks dictated market moves. The dollar index (DXY) climbed 0.22% to 108.052, putting the greenback on track for its fourth gain in five sessions. The euro slipped 0.2% to $1.0384, reflecting a weaker outlook as ECB signals pointed toward potential rate cuts.

Fed’s Cautious Stance Lifts Dollar Outlook

The Federal Reserve’s recent projections outlined a slower pace of rate cuts than traders had anticipated, reinforcing support for the dollar. Friday’s dip, triggered by softer-than-expected inflation data, quickly reversed as markets reassessed the Fed’s commitment to controlling inflation above the 2% target. Current pricing reflects 33 basis points of cuts for 2025, falling short of the two 25-basis-point cuts projected by the Fed.

Treasury yields echoed this sentiment, with the 10-year yield rising 5 basis points to 4.586%, while the 2-year note climbed to 4.348%. Despite a 1.1% decline in durable goods orders for November—the largest drop since June—strong capital goods demand suggested economic resilience. A fall in consumer confidence to 104.7, down from 112.8, underscored mixed signals heading into 2025.

Euro and Yen Weaken as Policy Divergence Grows

The euro edged lower as ECB President Christine Lagarde indicated inflation was nearing target levels, raising the possibility of rate cuts next year. Lagarde’s comments contrast with the Fed’s cautious approach, narrowing the euro’s appeal against the dollar.

The Japanese yen depreciated 0.46% to 157.13, reflecting the Bank of Japan’s decision to maintain current policy. Governor Kazuo Ueda’s remarks reduced expectations for a January rate hike, keeping the yen near intervention levels. Sterling followed suit, weakening 0.37% to $1.2523 after the Bank of England opted to hold rates steady, though a larger-than-expected split vote hinted at growing internal divisions.

Gold Faces Headwinds from Rising Yields and Dollar

Gold prices slipped 0.4% to $2,611.17 per ounce as rising Treasury yields and a stronger dollar curbed demand. While gold has posted a 27% year-to-date gain—its best performance since 2010—traders recalibrated expectations following the Fed’s signal of fewer rate cuts in 2025. Spot gold remains under pressure, with markets awaiting clearer monetary policy signals early next year.

Market Forecast

The dollar is poised to extend gains as long as the Fed’s cautious stance contrasts with more dovish signals from global counterparts. The DXY could push toward 109.00 if upcoming labor market data reinforces inflationary pressures.

Conversely, weaker data may spark renewed bets on earlier rate cuts, limiting upside potential. The euro may struggle to break above $1.0450, while yen weakness could persist unless BoJ policy expectations shift. Gold’s performance will likely hinge on evolving Fed guidance, with support near $2,580 amid ongoing geopolitical uncertainty.