US Dollar Forecast: Will DXY Extend Higher This Week? CPI and PPI Set to Drive Next Move

Dollar Rises as Fed Holds Steady, Trade Risks Ease, and U.S. Data Sends Mixed Signals

The U.S. Dollar Index (DXY) posted its first monthly gain of 2025 last week, rising nearly 3% and briefly touching 100.10. A combination of supportive trade developments, hawkish Federal Reserve communication, and firm Q2 GDP growth drove the dollar higher, though a weaker-than-expected July employment report capped the move late in the week.

Tariff Relief Sparks Dollar Rebound

The week opened with DXY rallying after the U.S. secured multiple trade agreements with the EU, Japan, South Korea, and the U.K. These deals reduced or froze planned tariff hikes and removed a key risk premium that had weighed on the dollar since April. The EU agreement in particular—featuring U.S. tariff reductions and European commitments to increase energy and defense spending—triggered a sharp selloff in the euro and helped broaden dollar gains against most major peers.

Growth Outpaces Expectations

Midweek, second-quarter GDP was reported at an annualized 3.0%—well above the 2.3% consensus and a significant rebound from Q1’s contraction. The data reflected strong consumer spending and a sharp drop in imports, despite weaker business investment and exports. The release prompted an uptick in Treasury yields and reinforced market confidence in the U.S. expansion.

Fed Holds Rates, Avoids Dovish Signals

At its July meeting, the Federal Reserve left the policy rate unchanged at 4.25–4.50% and offered no indication of an impending rate cut. Core PCE inflation rose 2.6% year-over-year in June, slightly above expectations, and Chair Powell emphasized the Fed has made “no decisions about September.” The market scaled back expectations for near-term easing, lending further support to the dollar even as yields softened modestly after the meeting.

Labor Market Slows Sharply

However, Friday’s nonfarm payrolls report showed clear signs of labor market fatigue. The economy added just 73,000 jobs in July—its weakest print in five months—and the unemployment rate edged up to 4.2%. Downward revisions to prior months reduced net gains by 258,000. This data introduces a new layer of uncertainty for the Fed and tempered some of the week’s earlier dollar optimism.

Forecast: Dollar Supported, But Labor Weakness Could Complicate Fed Outlook

Looking ahead, the dollar remains underpinned by strong growth, improved trade clarity, and a Fed that is not rushing to ease. But last week’s labor data introduces a cautionary tone.

If this week’s CPI and PPI reports suggest inflation is easing alongside hiring, rate cut expectations may regain traction. For now, dollar strength is intact, but sustained upside will require inflation to stay sticky or growth momentum to hold.

Technically, the main trend is down, but momentum is trending higher. Look for the index to strengthen on a sustained move over 99.177 and for it to weaken on increased selling pressure under 98.317.

More Information in our Economic Calendar.