US Dollar Forecast: DXY Falls as U.S.-Japan Trade Deal Fails to Lift Greenback

Dollar Struggles for Direction as Trade Deal and Technicals Collide

The U.S. dollar extended its weakening trend on Wednesday, showing limited upside despite a U.S.-Japan trade agreement that averted fresh tariffs.

The U.S. Dollar Index (DXY) fell to 97.34, down 0.06% on the day, as traders weighed the implications of tighter foreign central bank policies and persistent political uncertainty in Japan.

Market reaction suggests that tariff relief alone isn’t enough to change sentiment toward the greenback, especially in the absence of stronger domestic economic catalysts.

The trade deal between Washington and Tokyo did lift risk sentiment, with particular benefit to the Japanese yen, which briefly touched 146.20 before settling at 146.34.

With the Bank of Japan potentially in a position to raise rates, rate differentials could begin narrowing—undermining a core pillar of dollar strength.

Analysts note that any sign of policy normalization from the BOJ makes a USD/JPY move toward 150 less likely, putting further pressure on DXY’s top-heavy structure.

Dollar Underperforms as Other Majors Hold Ground

In contrast, the euro remains supported near four-year highs, last seen at $1.1735, while sterling rose 0.2% to $1.1356.

The Federal Reserve’s neutral tone and softer inflation indicators have done little to reignite dollar demand, even as markets remain cautious ahead of Thursday’s European Central Bank decision.

The ECB is expected to keep rates unchanged, but guidance will be closely watched, particularly with U.S. policy expected to remain steady through the summer.

The Australian dollar gained 0.4% to $0.6581, driven by stronger metal prices and optimism from the Japan trade announcement. This move reinforces the dollar’s vulnerability to higher beta FX, particularly when risk appetite improves.

Chart Signals: Dollar Rejected at Key Resistance, Trend Still Bearish

The DXY chart shows a continued downtrend from the March peak near 104.68. After failing to break above its 50-day moving average (98.5) and posting a lower high at 98.95, the index now trades just above recent support at 96.37. The 200-day moving average, now at 103.47, remains well above price, underscoring the prevailing bearish structure.

Unless the dollar can reclaim the 98.50 level with conviction, rallies are likely to be sold.

The failed breakout above the July high suggests waning momentum. A daily close below 97.30 would expose the DXY to a potential retest of 96.37, with further downside possible if foreign central banks turn more hawkish.

Market Forecast: DXY Remains on the Defensive Below 98.50

With the U.S.-Japan deal failing to deliver lasting dollar strength, and with no immediate rate catalysts on the Fed’s calendar, the dollar remains at the mercy of external developments.

A dovish ECB or BOJ surprise could offer temporary relief, but technically and fundamentally, the DXY remains vulnerable.

Unless 98.50 is reclaimed soon, price action favors downside continuation toward 96.00. Traders should watch rate commentary and positioning data closely for confirmation.

More Information in our Economic Calendar.