Dollar Index Rebounds from Lows but Risks Linger as Global Pressure Mounts
The U.S. Dollar Index (DXY) is showing signs of two-sided trade early this week, bouncing from a session low of 100.050 and respecting a key minor pivot at 99.949.
This technical move suggests short-term support is holding, opening the door for a potential rally toward the 101.302 resistance, with the 50-day moving average looming at 101.600. However, failure to hold above 99.949 may expose the index to deeper losses, with 99.172 as the next downside target.
A further 10% decline could push DXY toward levels last seen during President Trump’s first term, adding to trader concerns about the dollar’s long-term viability.
Debt Burden and Credit Downgrade Undermine Dollar Confidence
Long-term dollar bears are gaining traction, as structural concerns grow louder. With the U.S. fiscal deficit projected to increase by $3 trillion to $5 trillion due to sweeping tax cuts, confidence in U.S. fiscal management is eroding. Deutsche Bank’s George Saravelos cited “diminished appetite” for U.S. assets and persistent high deficits as a mounting source of anxiety.
The recent Moody’s downgrade of the U.S. sovereign credit rating to “Aa1” from “Aaa” only deepened market unease. Although markets have so far absorbed the blow without major dislocation, the symbolic loss of triple-A status could further dent the dollar’s safe-haven appeal.
Foreign Investors Rethink Exposure to U.S. Assets
The dollar’s weakening status as a global hedge is prompting institutional reevaluation. BNP Paribas’ Peter Vassallo noted concerns among foreign investors that the dollar no longer provides the diversification it once did. Massive USD exposure in Asia—totaling roughly $2.5 trillion—adds to the potential for currency rebalancing.
As hedge ratios rise, selling pressure in forward markets could accelerate, especially if recent currency movements like Taiwan’s surge serve as a wake-up call. For now, firms like Robeco see no wholesale exit from dollar-denominated assets, but the risk is growing.
Gold Gains on Dollar Weakness and Global Risk Cues
Gold prices ticked higher on Tuesday, benefitting from a softer dollar and revived hopes for U.S.-China trade stability and Russia-Ukraine negotiations. Despite the broader risk-on tone capping further gold upside, lingering uncertainty and recent credit jitters have kept downside limited.
ActivTrades’ Ricardo Evangelista said traders are still eyeing safe-haven hedges, while Swissquote’s Carlo Alberto De Casa projected a price “superzone” above $3,200 if support levels hold. This duality—strong risk appetite coexisting with hedging demand—mirrors the tug-of-war in currency markets.
Market Forecast: Dollar Faces Downward Pressure as Risk Appetite Builds
With the DXY still elevated around 10% above its 20-year average and speculative net short positions near multi-year highs, the dollar remains vulnerable to deeper corrections.
The combination of reduced U.S. asset appeal, debt-driven skepticism, and a reevaluation of reserve currency status signals further downside risk. While technical support may trigger near-term rallies, the broader setup favors selling strength.
Unless U.S. economic surprises force a hawkish Fed pivot, dollar rallies are likely to be capped, especially as gold continues to attract safe-haven flows and foreign investors reevaluate dollar-heavy exposures.
More Information in our Economic Calendar.
