US Dollar Forecast: Slips to 2022 Low as Soft PPI Data Boosts Rate Cut Bets

Dollar Index Slumps as Soft U.S. Inflation Data and Tariff Concerns Weigh on Sentiment

The U.S. Dollar Index (DXY) fell to its lowest level since April 2022 on Thursday, dragged down by weaker-than-expected inflation figures and renewed unease over U.S.-China trade policy. Safe-haven demand from geopolitical tensions in the Middle East added pressure, pushing Treasury yields lower and strengthening rival currencies like the yen and the euro.

Technically, the trend remains bearish, with the 50-day moving average at 100.000 acting as firm resistance. While the index briefly breached the multi-year low at 97.685 before rebounding, it remains structurally weak. A dovish pivot or surprise rate cut from the Federal Reserve next week could trigger a breakdown, opening the door to a potential slide toward the next key support at 95.137.

Producer Prices Undershoot Forecasts, Fueling Rate Cut Bets

The May U.S. Producer Price Index rose just 0.1% month-over-month, falling short of the 0.2% consensus estimate. Core PPI also missed forecasts, increasing only 0.1% versus expectations of 0.3%. The subdued data followed Wednesday’s similarly mild Consumer Price Index report and reinforced expectations that inflationary pressures are cooling. As a result, traders increased bets on a potential Federal Reserve rate cut in September.

Treasury yields responded sharply, with the 10-year note sliding nearly 5 basis points to 4.367%, while the 2-year yield dipped to 3.897%. Strong demand at Wednesday’s $39 billion 10-year auction and cautious positioning ahead of a $22 billion 30-year sale also signaled ongoing risk aversion.

Middle East Tensions and Trade Frictions Push Investors to the Sidelines

Safe-haven flows intensified after reports of heightened security risks in the Middle East. The U.S. moved personnel from the region, briefly spiking oil prices by 4% before retracing. At the same time, an Air India crash and fresh threats from Iran added to regional instability. Gold surged nearly 1% to $3,385 an ounce, while the Swiss franc and Japanese yen gained 1% and 0.7% respectively against the dollar.

The positive tone following the recent U.S.-China trade deal unraveled as President Trump hinted at new tariff measures targeting over a dozen countries. Although the “great deal with China” was lauded on Wednesday, Thursday’s comments about pending tariff letters injected fresh uncertainty into global markets.

Budget Concerns and Jobless Claims Offer Little Relief

The U.S. Treasury reported a $316 billion deficit for May, a 9% improvement from a year earlier, though the fiscal year-to-date shortfall is running 14% higher at $1.36 trillion. Weekly jobless claims remained unchanged at 248,000, doing little to offset concerns over fiscal sustainability and growth prospects.

Outlook: DXY Faces Continued Headwinds as Rate Cut Odds Rise

With inflation readings under control and geopolitical risk climbing, the Federal Reserve is expected to adopt a more dovish tone in coming months. The DXY, which has already dropped 10% year-to-date, is likely to remain under pressure unless trade tensions ease significantly or U.S. data surprises to the upside. For now, fading inflation momentum and heightened external risk tilt the balance toward further dollar softness into summer.

More Information in our Economic Calendar.