US Dollar Forecast: DXY Falls as PPI Miss and Powell’s Warning Weigh on Sentiment

Tariff Truce Loses Momentum, Weighs on Dollar Index

The U.S. dollar fell across the board on Thursday as optimism surrounding a 90-day tariff pause between the U.S. and China began to fade. The Dollar Index (DXY) erased most of its early-week gains, with investors rotating into safe-haven currencies such as the Japanese yen, which gained 0.6% to 145.94 per dollar, and the Swiss franc, which firmed to 0.8384.

While the tariff truce initially calmed recession fears, strategists like Macro Hive’s Benjamin Ford noted that markets have “exhausted the positivity” from the announcement. The euro rose 0.2% to $1.1192, and Asian currencies broadly advanced, led by a 0.8% surge in the South Korean won after reports of U.S.-Korea FX discussions. The Taiwan dollar also strengthened by 0.6%.

Although a Bloomberg report clarified that the U.S. isn’t seeking a weaker dollar in trade talks, the greenback remained under pressure due to ongoing concerns about trade policy volatility and reduced global appetite for U.S. assets. Amundi Investment Institute reiterated a bearish outlook on the dollar, citing continued capital rotation into Europe, Asia, and emerging markets.

Fed Chair Powell Warns of Policy Challenges from Supply Shocks

In a closely watched speech, Federal Reserve Chair Jerome Powell said that long-term rates are likely to remain elevated due to structural changes in the economy. He pointed to an environment of more frequent supply shocks, potentially making inflation more volatile. Powell indicated that while long-term inflation expectations remain anchored near the Fed’s 2% target, the central bank’s previous near-zero rate policy is unlikely to return.

The Fed has held rates in a 4.25%-4.50% range since late 2024. Despite easing inflation, Powell made no promises on rate cuts, reiterating the difficulty of balancing inflation control and employment amid external pressures like tariffs. He confirmed the Fed is re-evaluating its communication strategy and inflation targeting as part of its policy framework review.

PPI Surprise Pulls Treasury Yields Lower, Adds to Dollar Pressure

April’s Producer Price Index fell 0.5% month-over-month, well below the 0.3% forecast. Core PPI dropped 0.4%, driven by the steepest services price decline in the dataset’s history. Wholesale margins in machinery and vehicle sales dropped 6.1%, and trade services slumped 1.6%. The weak inflation print dragged Treasury yields lower, with the 10-year yield down over 5 basis points to 4.477%.

Retail sales rose a modest 0.1% in April, in line with expectations but down from March’s 1.7% jump. Jobless claims held steady at 229,000. The mixed data reinforced the market’s pricing of two rate cuts by year-end, with the first likely in October.

Market Forecast: DXY Under Pressure, Policy Uncertainty Limits Rebound

The DXY is likely to stay under selling pressure in the near term as weak inflation data softens Fed rate hike odds and Powell’s warnings complicate the policy outlook. With safe-haven flows favoring the yen and Swiss franc and capital shifting toward non-dollar assets, traders may remain reluctant to re-enter long dollar positions.

The market is facing headwinds at a pivot at 101.302 and the major 50-day moving average at 101.800. Until these levels are overcome, the way of least resistance is down with 99.391 the next target.

More Information in our Economic Calendar.