US Dollar Forecast: DXY Retreats from 50-Day Average as Fed Dovish Shift Hits Sentiment

Dollar Index Retreats After Early Rally on Geopolitical Jitters and Fed Commentary

The U.S. Dollar Index (DXY) opened Monday with a surge, bolstered by safe-haven flows as oil prices jumped and equity markets sold off on fresh geopolitical tensions. However, the rally stalled at the 50-day moving average of 99.500, prompting a pullback as market sentiment shifted and Federal Reserve commentary turned dovish.

At 15:58 GMT, the DXY is trading 98.681, 0.093 or -0.09%.

OPEC Risk Premium Fades as Crude Reverses

The early jump in the DXY followed reports of U.S. strikes on Iranian nuclear facilities, heightening fears of a broader conflict. Iran’s threat to close the Strait of Hormuz—a crucial chokepoint for global oil supply—triggered a spike in oil prices, which initially pressured risk assets and drew capital into the dollar. However, as crude reversed lower and equity markets rebounded, safe-haven demand for the greenback faded.

The index had briefly pushed above its June 4 high of 99.392, peaking at 99.42 before stalling just below technical resistance at 99.500. That level remains critical; a breakout would target 100.540, while failure leaves the DXY vulnerable to tests of 98.521 and 97.621.

Federal Reserve Dovish Signals Undercut Dollar Gains

Adding pressure to the dollar, Fed Vice Chair Michelle Bowman shifted tone, suggesting that rate cuts may be needed soon. Citing rising risks to the labor market and less concern over tariff-driven inflation, Bowman’s comments contradicted the Fed’s prior “hawkish hold,” where Chair Jerome Powell had warned of summer inflation pressures.

Powell’s upcoming testimony before Congress will be closely watched for clarification. Any softening in his tone could accelerate downward pressure on the dollar, especially if paired with easing geopolitical tensions.

Funding Trade Unwinds and Cross-Currency Flows Weigh

The dollar’s earlier strength also stemmed from traders closing out carry trades, where the greenback had been used as a funding leg against higher-yielding EM currencies. According to Bannockburn’s Marc Chandler, the rally was more about position unwinding than a structural dollar shift.

Meanwhile, the yen dropped to 148.02 per dollar, its weakest since May 13, as higher oil prices compounded Japan’s energy import burden. In contrast, the euro and pound posted modest gains following mixed regional PMI data. Cryptocurrencies firmed, with bitcoin up 2.35% to $101,903.

DXY Outlook: Range-Bound Unless Fed or Oil Prices Drive a Breakout

With conflicting drivers—geopolitical risk supporting the dollar and dovish Fed commentary capping gains—the DXY remains range-bound. The 99.500 level is the key pivot. A confirmed breakout could trigger momentum toward 100.540, but softening oil and Powell’s upcoming testimony suggest downside risk remains toward 98.521 in the near term. Traders should remain focused on Fed tone and developments in the Middle East.

More Information in our Economic Calendar.