US Dollar Forecast: Short-Covering Supports DXY with Fed and Geopolitics in Focus

DXY Reclaims Ground Despite Mixed U.S. Retail Data

The U.S. Dollar Index (DXY) edged higher on Tuesday, trading just above the multi-year low of 97.621 as traders positioned for Wednesday’s Federal Reserve policy decision.

The move comes after retail sales data for May underwhelmed, contracting by 0.9%—sharply worse than the -0.6% forecast. However, support for the greenback emerged from continued wage strength and a swift recovery in intraday sentiment, suggesting the dollar’s oversold status remains a key technical driver.

While the retail headline was soft, core sales (excluding autos) slipped only 0.3%, slightly missing the 0.1% gain expected. The muted market reaction points to a wait-and-see approach ahead of the Fed’s next policy move.

U.S. Treasury yields retreated following the data, with the 10-year yield down 3.7 basis points to 4.417%, signaling growing market concern over economic softness and bolstering safe-haven demand for the dollar.

Middle East Conflict Adds Safe-Haven Bid to the Dollar

Geopolitical risk continues to elevate the dollar’s appeal. The Israel-Iran conflict, now in its fifth day, has intensified with reports of ongoing missile exchanges and evacuation orders from both nations. President Trump’s early exit from the G7 summit and warnings of escalating violence have only fueled investor anxiety, particularly after he advised Americans to evacuate Tehran in anticipation of Israeli strikes.

The uncertainty has pushed Brent crude prices higher and contributed to fragile global risk sentiment. ForexLive’s Adam Button noted that markets remain caught between reacting to economic data and tracking the progression of the Middle East conflict, resulting in erratic dollar-yen price action.

BOJ’s Tepid Guidance Undermines Yen Strength

In contrast, the Bank of Japan opted to maintain policy rates and signaled a slowdown in balance sheet reductions for 2025, citing external risks. Despite a momentary yen bounce, the currency ultimately weakened, pushing USD/JPY up to 145.17. Markets largely shrugged off BOJ Governor Kazuo Ueda’s press conference, viewing it as lacking policy momentum.

Real Estate Weakness and Bond Rally Raise Recession Red Flags

Meanwhile, U.S. homebuilder sentiment sank to 32 in June, nearing pandemic lows. Higher mortgage rates and ongoing tariff and economic uncertainty are hitting both consumer confidence and pricing power in housing. Treasury yields across the curve declined, with the 2-year note at 3.96%, reinforcing recession fears.

Outlook: DXY Eyes 50-Day Average, Fed to Set the Tone

With DXY hovering near 98, technical resistance at the 50-day moving average (99.70) is now in focus. Traders expect the Fed to hold rates steady but will scrutinize Chair Powell’s tone for any signal on the timing of future cuts.

Oversold conditions, geopolitical stress, and fading consumer strength argue for a cautious, range-bound bias in the near term. A hawkish tilt from the Fed could prompt a test of 100, while any dovish surprise would reinforce support closer to 97.60.

More Information in our Economic Calendar.