US Dollar Forecast: DXY Pulls Back as Trump Tariff Threat Hits Market Confidence

Trump Tariff Threat Sends Yields and Dollar Lower as Market Eyes Fed, France, and Japan Risks

U.S. Treasury yields fell sharply Friday after former President Donald Trump threatened a “massive increase of tariffs” on Chinese imports, injecting fresh geopolitical risk into already jittery markets.

The dollar softened alongside yields, with DXY retreating from its weekly highs, as traders weighed the impact of weaker rate hike odds and rising political uncertainty abroad.

Trump’s comments, posted on Truth Social, warned that China was becoming “very hostile” and was lobbying other nations on rare earth export controls. His remarks rattled risk sentiment, pushing investors into bonds and gold, while sending equities into a brief dip before dip buyers stepped in. The 10-year Treasury yield fell 8 basis points to 4.063%, while the 2-year dropped 7 bps to 3.522%.

With Washington gridlocked and the economic calendar light, the market remains in data blackout mode due to the government shutdown, now in its 10th day.

DXY Retreats From Highs as Rate Cut Bets Remain Firm

The dollar index pulled back to 99.33, down from Thursday’s two-month high, as Fed speakers reinforced the likelihood of rate cuts despite some resistance internally. Fed Governor Christopher Waller said Friday that the central bank should remain “cautious” but confirmed his support for easing.

Fed fund futures are now pricing in a 95% probability of a 25 basis point cut in October, with odds of a second cut in December easing to 80%. The FOMC minutes released earlier this week showed general support for cuts, but less clarity on the pace, as inflation data remains incomplete due to the shutdown.

France and Japan Add to Global FX Volatility

The euro hovered near two-month lows at $1.15705, on pace for a 1.5% weekly drop, as political turmoil in France deepened. President Macron’s struggle to find a new prime minister capable of steering through a tightening budget has dented confidence in the eurozone’s second-largest economy.

Meanwhile, the yen remains under pressure, despite recovering slightly to 152.7 per dollar. It’s set for a 3.5% weekly decline—its worst in a year—on fading bets for a Bank of Japan rate hike following Sanae Takaichi’s political win. Finance Minister Kato acknowledged growing FX concerns but offered no concrete action.

Market Forecast: Dollar Faces Resistance into 100 as Risks Multiply

With Treasury yields easing, geopolitical risk re-emerging, and foreign political uncertainty adding to pressure, the DXY may struggle to break cleanly above 100. Resistance at that level remains intact, and without new economic data or a hawkish Fed shift, dollar upside looks capped near-term. Traders should watch upcoming earnings and Fed commentary for directional cues.

More Information in our Economic Calendar.