US Dollar Forecast: DXY Falls to Multi-Month Low as Fed Rate Cut Expected

Dollar Index Slides to Critical Support as Fed Rate Cut Looms

The U.S. Dollar Index (DXY) plunged to multi-month lows on Tuesday, falling through key support levels at 97.253 and 97.109 as traders ramped up bets for a Federal Reserve rate cut. With the index touching 96.738—its lowest since early July—the next downside target is the July 1 low at 96.377. A break below this level could accelerate selling pressure, opening the door to a test of the multi-year low at 95.137.

Fed in Focus: Is a 25-Basis-Point Cut Already Priced In?

Markets are pricing in a 25-basis-point rate cut at the conclusion of Wednesday’s FOMC meeting. While this move is largely expected, traders are focused on Chair Jerome Powell’s tone and forward guidance. Any signal of ongoing dovishness or concerns about inflation could extend the dollar’s decline. On Monday, President Trump renewed pressure on the Fed via social media, urging a “bigger” cut to support the housing market.

Jefferies strategist Mohit Kumar noted that if Powell emphasizes inflation uncertainty, markets could recalibrate expectations for future easing. The DXY’s current selloff reflects a build-up of bearish momentum, triggered by soft labor data and aggressive rate cut expectations.

Global Currencies Climb as Dollar Weakens

The greenback’s losses were broad-based. The euro surged 0.7% to $1.1837, its strongest since July 1, buoyed by modest gains in euro zone industrial production and an unexpected uptick in German investor sentiment.

Sterling rose 0.5% to $1.3667 after UK jobs data showed slowing private sector wage growth, reducing pressure on the Bank of England to tighten further.

The Australian dollar touched a 10-month high at $0.6677 before pulling back slightly, while the dollar dropped 0.5% against both the Swiss franc and Japanese yen. The yen’s strength comes ahead of Friday’s Bank of Japan meeting, where no policy change is expected despite ongoing leadership changes in Tokyo.

Retail Sales and Treasury Yields Underscore Consumer Strength

Stronger-than-expected U.S. retail sales also weighed on the dollar, with August figures showing a 0.6% monthly gain, double the consensus forecast. Excluding autos, sales climbed 0.7%, suggesting resilient consumer demand despite macro headwinds. Treasury yields responded accordingly, with the 10-year rising 3 basis points to 4.064%.

Market Forecast: DXY Faces Pressure Below 96.377

The DXY is now testing critical technical support. A decisive close below 96.377 would likely trigger further downside, with 95.137 as the next major support zone.

With Fed easing largely priced in, the dollar’s path will hinge on Powell’s guidance. If the Fed signals ongoing concerns about inflation and growth, expect the DXY to remain under pressure, especially if Treasury yields continue rising on stronger economic data.

More Information in our Economic Calendar.