US Dollar Forecast: Will Gold Continue to Rally as Fed Rate Cuts Pressure the Greenback?

U.S. Dollar Index Weakens as Fed Rate Cut Expectations Mount

The U.S. Dollar Index (DXY) fell sharply this week, closing at 100.417, down 0.32%. This continues a multi-week downtrend driven by growing expectations of further rate cuts from the Federal Reserve, along with softening inflation data. As the dollar struggled, major currencies like the euro and yen saw renewed strength, while gold surged to record highs before pulling back slightly.

Federal Reserve’s Rate Cut Outlook Weighs on Dollar

The dollar’s weakness was largely attributed to rising speculation that the Federal Reserve will deliver a 50 basis point (bps) rate cut in November, with market pricing for this cut increasing to 56.7%​. This dovish outlook was bolstered by softer inflation data, with the PCE price index increasing by only 0.1% in August and 2.2% over the year​.

Fed Chair Jerome Powell’s recent comments suggest a shift in focus toward maintaining labor market strength over aggressive inflation control. This pivot reduced the greenback’s appeal as a safe-haven asset, exacerbating its decline. Lower inflation and moderating consumer spending have reinforced expectations that the Fed will continue easing monetary policy.

Euro Declines but Ends Near Weekly High, Yen and Gold Surge

The EUR/USD pair closed slightly lower for the week at $1.11593, down 0.01%, but finished near its weekly high after rebounding from a low of $1.10831​. The euro’s decline was limited by optimism surrounding Chinese stimulus measures, which are expected to benefit European exports​.

The yen strengthened significantly, closing at 142.157 against the dollar, as political changes in Japan spurred speculation of a hawkish policy shift under the leadership of Shigeru Ishiba​.

Meanwhile, gold set a new record, briefly touching $2685.64 before finishing the week at $2658.55, up $36.315 or 1.38%​. Gold’s surge has been driven by heightened demand for safe-haven assets, particularly as expectations for further Fed rate cuts grow.

Technicals: Dollar at Risk of Further Losses

Technically, the DXY remains stuck between key long-term retracement zone levels. The 50% retracement at 101.994 continues to cap gains, while the Fibonacci level at 98.976 is the next major downside target. Additionally, the July 2023 low of 99.578 serves as a key support, with a break below potentially accelerating selling pressure​.

Market Forecast: Dollar Set for Further Declines

In the near term, the U.S. dollar is expected to face continued downward pressure. Fed rate cuts are likely to weigh on the greenback, especially as major currencies like the euro and yen stabilize. The DXY could test lower support levels if the Federal Reserve maintains its dovish stance, with traders eyeing a possible drop toward the 98.976 level.

Gold remains a strong alternative to the dollar, supported by safe-haven demand and expectations of further monetary easing. Analysts predict continued bullish momentum for gold, with potential to breach $2700 by year-end if the Fed continues cutting rates and global economic uncertainty persists. Traders should monitor key U.S. economic data and central bank commentary for further market cues.