US Dollar Forecast: Is Hot Core PCE Masking Economic Fragility for Dollar?

Dollar Index Pressured as OPEC Calm, Fed Pivot, and Stagflation Fears Collide

The U.S. Dollar Index (DXY) closed at 97.254 on Friday, just above its three-year low of 96.997, as a convergence of easing geopolitical tensions, a dovish Fed shift, and stagflation concerns pushed the dollar toward critical support levels. Despite a hotter core PCE reading, the dollar’s traditional safe-haven appeal eroded, leaving the index exposed to further downside.

Israel-Iran Ceasefire Crumbles Safe-Haven Premium

A Trump-brokered Israel-Iran ceasefire triggered a 6% drop in Brent crude to $67.14, removing Middle East tension that had supported the dollar’s safe-haven bid.

Risk-on sentiment dominated as the S&P 500 hit record highs at 6,173, while gold slipped 1.65% to $3,273.67/oz, signaling reduced crisis hedging flows. The dollar failed to attract defensive flows, redirecting capital into higher-yielding equities and technology sectors, weakening its support.

Mixed PCE Data Sparks Stagflation Worries

Friday’s economic data showed core PCE rising 0.2% m/m (2.7% y/y), above expectations, while personal income fell 0.4% and spending slipped 0.1%. Markets interpreted these numbers as evidence of tariff-induced stagflation rather than healthy demand-driven inflation.

Despite an improved University of Michigan sentiment reading at 60.7, the decline in income and spending underlined economic fragility, limiting the dollar’s ability to rally on inflation signals.

Federal Reserve Pivot Shifts Yield Outlook

Fed Vice Chair Bowman’s dovish comments on June 23 and Chair Powell’s testimony on June 25 opened the door to policy easing, lifting July rate cut odds to 25% and year-end cuts to 65 basis points.

This dovish tilt reduced the dollar’s carry advantage despite stable Treasury yields (10-year at 4.39%, 2-year at 3.3%, 30-year at 4.85%). The bull steepening in Treasuries and reduced Fed funds expectations weakened traditional dollar-yield support, further pressuring the DXY.

Euro and Yen Strength Fuel Dollar Breakdowns

EUR/USD surged to 1.1754 as the ECB signaled nearing the end of its rate-cut cycle, while USD/JPY dropped to 143.749, reflecting yen strength from safe-haven flows. The DXY traded below its 50-week and 100-week SMAs, breaking support levels with no bullish reaction, reinforcing market conviction toward a bearish dollar outlook.

Market Forecast: DXY Eyes 95.137 Multi-Year Target

With the DXY down nearly 12% from 2025 highs and closing near 97.254, the technical structure remains firmly bearish, targeting the 95.137 multi-year support as institutional flows align with weaker dollar sentiment.

Reduced geopolitical risk premium, dovish Fed pivot, and stagflation concerns have created conditions for continued dollar downside, leaving traders focused on the next support test to confirm the broader structural decline in dollar strength.

More Information in our Economic Calendar.