US Dollar Forecast: Bearish Break in DXY Fuels Gold Rally as Deficit Fears Escalate

Trump’s Tax Push Raises Fiscal Alarm, Weighs on Dollar

The U.S. dollar fell for the third straight session on Wednesday, pressured by growing market skepticism over President Donald Trump’s tax bill and concerns over the country’s worsening fiscal outlook.

The U.S. Dollar Index (DXY) broke decisively below the key 50% retracement level at 99.949, confirming a loss of upward momentum. This level now acts as resistance, signaling a shift in trader sentiment. Should selling pressure intensify, downside targets emerge at 99.172, 98.901, and 97.921.

At 13:57 GMT, the U.S. Dollar Index is trading 99.583, down 0.429 or -0.43%.

Trump’s tax proposal, estimated to add $3 trillion to $5 trillion to the national debt, failed to rally full Republican support, further weighing on confidence in U.S. assets. At the same time, caution prevailed ahead of G7 finance meetings in Canada, with traders wary of any policy signals that could imply tolerance for a weaker dollar.

Treasury Yields Surge as Deficit Concerns Mount

Yields on U.S. government debt continued to rise, as investors demanded more compensation to hold bonds amid growing fiscal fears. The 30-year Treasury yield climbed nearly 6 basis points to 5.023%, while the 10-year and 2-year yields rose to 4.533% and 3.996%, respectively. These moves followed a credit downgrade by Moody’s, which lowered the U.S. rating to the second-highest tier.

Bridgewater Associates founder Ray Dalio warned that the credit downgrade underrepresents actual risk, highlighting the danger of monetary debasement if the government resorts to printing money to finance deficits. Market watchers will closely track a 20-year bond auction for signs of investor appetite at current levels.

Federal Reserve Holds Steady as Trade Uncertainty Lingers

Fed officials reiterated a cautious tone, expressing concern about the potential impact of Trump’s trade policies on economic growth. The central bank remains in a holding pattern, awaiting clearer signs from fiscal developments. Goldman Sachs analysts flagged the U.S.’s deteriorating growth-inflation mix, which continues to undermine its relative appeal.

Gold Breaks Higher on Dollar Weakness and Haven Demand

Gold prices advanced to their highest in more than a week, supported by the sliding dollar and heightened geopolitical unease. Spot gold rose after UBS pointed to increased buying interest at the $3,300 level. Recent gains are also underpinned by lingering fiscal concerns, central bank demand, and market hedging activity.

DXY Outlook: Momentum Turns Lower as Key Support Levels Near

The technical breach of the 100.949 level in the U.S. Dollar Index cements the shift in momentum to the downside. With support levels at 99.172, 98.901, and 97.921 now in play, traders should be prepared for continued weakness. Until fiscal and trade policy clarity improves, the path of least resistance for the dollar remains lower.

More Information in our Economic Calendar.