US Dollar Forecast: DXY Falls Below 97.62 as Q1 GDP Contracts and Fed Doubts Grow

DXY Breaches Key Support as Economic Contraction, Fed Credibility Concerns Mount

The U.S. Dollar Index (DXY) broke below the June 13 low of 97.621 on Thursday, slipping to its lowest level since early 2022. Persistent downside pressure follows weak Q1 GDP data, rising inflation estimates, and growing doubts about the Federal Reserve’s independence—just as markets begin pricing in additional rate cuts. With DXY trading under its 50-day moving average of 99.400, technical bias remains to the downside, with the 95.137 multi-year low now in focus.

GDP Shrinks, Inflation Rises—Mixed Signals Cloud Fed’s Path

The final estimate of Q1 GDP revealed a 0.5% contraction, a stark reversal from 2.4% growth in Q4 2024. The drag came from weaker consumer spending, soft exports, and a 2.8% slump in goods-producing industries. Services held firmer with a 1.1% gain in output. Inflation, however, firmed: the core PCE rose 3.5%, up 0.1 pp from previous estimates, bolstering expectations the Fed will stay cautious despite slowing growth. Markets are now pricing in 64 basis points of cuts by year-end, up from 46 bps last week.

Durable Goods Surge Masks Broader Weakness

Durable goods orders surged 16.4% in May, driven by a 48.3% spike in transportation equipment. However, excluding transportation, orders rose just 0.5%, suggesting a lack of broad-based manufacturing strength. This split underscores concentrated industrial momentum—largely capital-intensive—rather than a wholesale manufacturing recovery. Defense orders remained flat, offering little offset to civilian sector volatility.

Labor Market Softens as Insured Unemployment Climbs

Initial jobless claims dropped to 236,000, offering a short-term positive signal. Yet insured unemployment rose to 1.974 million—the highest since November 2021—pointing to deeper labor market stress. Regional disparities emerged, with layoffs climbing in states like Pennsylvania and Massachusetts, while falling in California and New York. Sectors like education and warehousing remain vulnerable, and sustained labor weakness could weigh on consumption and Fed sentiment.

Fed Credibility in Question as DXY Weakens

The dollar’s decline deepened after reports that President Trump may move to replace Fed Chair Powell by the fall, raising fresh concerns about central bank independence. This political interference narrative undermines rate expectations and adds risk premium to the dollar. The euro surged to $1.1708, its highest since 2021, while the dollar fell to 0.8007 CHF, a decade low. The yen gained as traders awaited BOJ’s next rate signals, with USD/JPY falling 0.7% to 144.25.

Market Forecast: DXY Vulnerable Below 99.40, Bearish Bias Holds

With the dollar trading below its 50-day MA and sentiment dented by policy uncertainty and softening macro data, DXY remains vulnerable. Watch for continued weakness into the 95.13 area unless inflation shows a sharp decline or Fed rhetoric turns hawkish. Until then, trader positioning should reflect a bearish dollar bias, favoring EUR, JPY, and CHF on relative stability and central bank divergence.

More Information in our Economic Calendar.