US Dollar Outlook: Bearish as Markets Price Two Fed Cuts and Political Uncertainty Grows

Dollar Index Retreats from Highs as Fed Policy and Political Risks Weigh

The U.S. Dollar Index (DXY) eased on Wednesday after testing a fresh short-term high of 98.635, before retreating to 98.044. That level sits just above key technical support at the 50-day moving average of 98.000. The recent pullback comes as growing concerns over Federal Reserve independence and expectations for additional rate cuts continue to pressure the greenback.

At 15:07 GMT, DXY is trading 98.073, down 0.232 or -0.24%.

Fed Cuts and Political Interference Undermining Dollar Support

Market participants are pricing in two more rate cuts by the Federal Reserve this year, with some traders positioning for a third by early 2026. The Fed’s dovish lean continues to be the primary driver of sustained dollar weakness, which has made the greenback the worst performer among major currencies in 2025, down nearly 10% year-to-date.

The persistent “short dollar” theme, heavily favored since late March, has further intensified. A Reuters poll conducted between August 29 and September 3 showed that 78% of respondents expect net short positioning to either increase or hold steady through September. Notably, none of the surveyed FX strategists anticipated a reversal to net long positions.

Ongoing political interference is also weighing on sentiment. President Trump’s calls for aggressive rate cuts to 1% and his efforts to remove Fed Governor Lisa Cook have sparked fresh concerns about the institution’s independence. Nominee Stephen Miran’s proposals to increase presidential control over the Fed—including the authority to dismiss its leadership—have amplified those fears.

ECB Eyes Dollar Liquidity Alternatives as Confidence in Fed Wavers

As the dollar comes under political strain, central banks in Europe are reevaluating their reliance on the Federal Reserve. Adam Posen, head of the Peterson Institute for International Economics, urged the ECB to explore pooling dollar reserves with other central banks to secure emergency liquidity in case the Fed’s support falters during a crisis.

Although the Fed renewed swap lines with several central banks earlier this year, the sheer size of the global dollar funding market—estimated at $29 trillion—compared to the $7 trillion in foreign-held dollar reserves suggests any alternative arrangements could only cover localized events. These concerns have led ECB supervisors to monitor European banks’ dollar exposures more closely and accelerated efforts like the development of a digital euro.

DXY Outlook: Critical Support and Resistance Levels in Play

Technically, the DXY is sitting just above the 50-day MA support at 98.000. A break above the intraday high of 98.635 could open the path toward 98.834 and possibly 99.320. However, failure to hold 98.000 could accelerate selling toward 97.859, with further downside targets at 97.536 and 97.109.

With market positioning heavily skewed against the dollar, any upside surprises in U.S. inflation data could spark a short-covering rally. Still, unless political risks subside and the Fed signals a hawkish shift, the dollar remains vulnerable to further downside pressure into year-end.

More Information in our Economic Calendar.