US Dollar Outlook: Lower Yields Pressure DXY, Gold Retreats from Three-Week High

What’s Behind the Dollar’s Retreat from a Two-Year Peak?

The U.S. dollar pulled back on Monday after an eight-week rally, driven by news of Scott Bessent’s nomination as Treasury Secretary under President-elect Donald Trump. Bessent’s reputation as a fiscal conservative reassured bond markets, easing U.S. Treasury yields and narrowing the greenback’s rate advantage.

The U.S. Dollar Index (DXY) declined 0.70% to 106.728, falling from Friday’s two-year high of 108.071. The dollar slipped 0.3% against the yen to 154.25, while the euro rose 0.6% to $1.0485, recovering from a two-year low of $1.0332.

How Are Yields and Policy Expectations Impacting the Dollar?

Bessent’s nomination contributed to a 6-basis-point decline in 10-year Treasury yields, which fell to 4.361%. Known for supporting a strong dollar and gradual tariffs, Bessent eased concerns about inflation risks stemming from Trump’s policies, prompting some investors to unwind bullish dollar positions.

The pullback is seen as temporary, with the dollar still benefiting from the divergence in global monetary policy. Futures markets now expect 150 basis points of easing from the European Central Bank (ECB) by the end of 2024, compared to 70 basis points from the Federal Reserve.

Meanwhile, the probability of a Fed rate cut in December stands at 56%, down from 75% a month ago, according to the CME FedWatch Tool.

Is Euro Weakness Losing Momentum?

The euro’s recovery comes after steep losses last week, driven by weak eurozone manufacturing data contrasted with strong U.S. survey results. This divergence widened yield spreads in favor of the dollar.

Some strategists argue that the euro may stabilize near $1.05, as the ECB’s dovish stance has largely been priced in. Traders will focus on inflation data and ECB policy signals this week to gauge whether euro weakness is bottoming out.

Gold Declines Despite Weaker Dollar, Lower Yields

Gold prices fell 2% on Monday, pressured by profit-taking and Bessent’s nomination, which eased fears of aggressive U.S. tariffs. Spot gold dropped 1.5% to $2,673.30 per ounce, retreating from a three-week high reached earlier in Asian trading.

After posting its strongest weekly gain in two years, gold saw profit-taking, exacerbated by reduced safe-haven demand. Bessent’s nomination is viewed by some as a market-friendly move that could temper economic risks.

Gold’s near-term direction will depend on upcoming data, including the Fed’s November meeting minutes and core PCE inflation figures. Expectations of a December Fed rate cut remain intact but have moderated, further influencing gold’s appeal.

Where Is the Market Heading Next?

The dollar’s retreat is likely a pause rather than a reversal, with its bullish outlook supported by monetary policy divergence and solid U.S. economic data. Key events, such as the Fed minutes and inflation data this week, could reignite the dollar rally if the Fed signals less aggressive easing for 2024.

Gold may face further selling pressure if risk sentiment improves, though geopolitical or economic shocks could reinstate its safe-haven appeal. For now, traders will closely watch inflation data for cues on rate expectations and market direction.

For a look at all of today’s economic events, check out our economic calendar.