US Dollar Forecast: DXY Rises on Weaker Yen and Inflation-Fed Uncertainty

Dollar Index Climbs as Traders Weigh Fed Outlook, Political Developments

The U.S. Dollar Index (DXY) extended its advance on Tuesday, buoyed by firming rate expectations and easing global political uncertainty.

he index broke through key technical thresholds at 98.714 and 98.797, positioning these levels as new short-term support. While the 50-day moving average at 98.056 remains the major floor, attention now shifts to the October 9 high at 99.563 and, beyond that, the August 1 peak at 100.257.

At 15:58 GMT, DXY is trading 98.939, up 0.347 or +0.35%.

With the Federal Reserve’s next policy decision just days away, markets are focused on Friday’s CPI inflation report, expected to offer the final material data input before the central bank convenes.

Expectations are for prices to rise at a slower pace than in August, which may reinforce the Fed’s pivot toward labor market conditions and potential rate cuts. However, any inflation surprise to the upside could shift expectations, reinforcing a hawkish bias.

Shutdown Nears Resolution as Treasury Yields Ease

Treasury yields fell across the curve on Tuesday, with the 10-year yield dipping below the psychologically significant 4% mark to settle at 3.955%. The decline followed growing optimism around a potential resolution to the U.S. government shutdown. White House economic adviser Kevin Hassett stated that a deal could materialize “very quickly” this week, with the administration prepared to escalate pressure if necessary.

Bond traders also reacted to the deepening economic data blackout, which has stalled key releases except for the CPI. The softening yields, particularly in the short end of the curve, underscore expectations that the Fed may soon pause or even begin easing if labor data continues to weaken and inflation decelerates.

Takaichi’s Win Pressures Yen, Supports Broader Dollar Strength

In currency markets, the Japanese yen weakened sharply after hardline conservative Sanae Takaichi secured election as Japan’s next prime minister. While her expected fiscal stimulus bolstered market sentiment, the prospect of a delayed monetary tightening cycle left the yen vulnerable.

The currency dropped 0.8% to 152.01 per dollar—its lowest level since October 14—helping lift the DXY to a six-day high of 98.95.

Takaichi’s likely appointment of Satsuki Katayama, a proponent of a stronger yen, as finance minister added a layer of policy uncertainty. Markets remain cautious, with the Bank of Japan now facing conflicting fiscal and monetary signals.

Market Forecast: Bullish Bias Builds on Policy Divergence

With the dollar drawing strength from policy divergence and renewed optimism around U.S. fiscal stability, the DXY is likely to retain a bullish bias heading into Friday’s inflation data.

As long as the index holds above its 50-day moving average, a test of the 99.563 resistance level appears increasingly probable. Broader risk appetite and global rate differentials continue to favor dollar strength in the near term.

More Information in our Economic Calendar.