US Dollar Forecast: DXY Falls as Traders Eye Support Break for Next Leg Down

Dollar Index Drops as Fiscal Concerns Undermine Sentiment

The U.S. Dollar Index (DXY) is on pace for its steepest weekly decline in five weeks, with Friday’s move signaling a potential trend change. Sliding below a key pivot at 99.949, the index is testing support at 99.172, eyeing further downside toward 98.901 and a broader support band near 97.921–97.685. The shift comes as market participants reassess the risk-reward profile of U.S. assets in light of fiscal instability.

At 14:29 GMT, the U.S. Dollar Index is trading 99.462, down 0.435 or -0.44%.

Is Washington’s Debt Crisis Weighing on the Greenback?

Concerns over the U.S. fiscal outlook are driving traders out of dollar positions. Last week’s downgrade of U.S. debt by Moody’s set the stage, but focus has now turned to the $36 trillion debt pile and a controversial tax bill from former President Trump. Labeled as a major economic overhaul, the bill risks adding trillions more to the deficit and faces a contentious Senate path. The DXY has slipped 1.35% this week, now trading around 99.614.

Rising Yields Fail to Support Dollar as Term Premium Surges

Despite a surge in U.S. Treasury yields—30-year bonds traded above 5%, nearing 19-month highs—the dollar has failed to capitalize. According to Pepperstone’s Chris Weston, the uptick in yields is not linked to economic strength but reflects fiscal anxiety. Foreign buyers are backing away as long-end yields climb due to higher inflation expectations and fears of sustained deficit spending.

Euro and Yen Capitalize on Dollar Weakness

The euro has gained 1% this week to $1.1338, snapping a four-week losing streak. Up 9% year-to-date, the currency continues to benefit from eurozone stability and diminished trade tensions. Meanwhile, the yen climbed 1.5% for the week, strengthening to 143.47 per dollar, driven by accelerated core inflation in Japan that could prompt further rate hikes from the Bank of Japan.

Market Outlook: Trend Change Confirmed as Dollar Faces Structural Headwinds

With the DXY breaking below its previous trend support and fundamentals deteriorating, bearish momentum is likely to persist. Analysts highlight that fiscal credibility—not recession fears—is emerging as the dominant market driver.

As long as long-end yields rise due to inflation concerns and foreign demand for Treasuries wanes, dollar sentiment is poised to weaken further. Traders should watch for potential technical breaks below 98.901 as confirmation of extended downside risk.

More Information in our Economic Calendar.