The has weakened in recent days mainly because US monetary policy looks more supportive and less restrictive. Signals from growth and employment data suggest that interest rate advantages in the US are fading. As a result, the fell to around 98.35, its lowest level in several weeks, showing that markets now expect further ahead.
The pressure on the US dollar does come from the Federal Reserve, but it also comes from abroad. The yen has strengthened as investors expect a rate hike in Japan. This stronger yen has added to the pressure on the US dollar and has limited any recovery.
Post Fed Pricing: Rate Cut, Message ’Data Dependent’
The Fed cut by 25 basis points to a range of 3.50% to 3.75% at its December 11 to 12 meeting, and the first reaction was negative for the US dollar. The updated language saying future moves will depend on incoming data led some investors to think the Fed may pause for some time. Even so, the overall message still felt supportive rather than restrictive.
Powell said policy has reached an appropriate level and the Fed now has room to watch the data. This reinforced the view that the period of rate tightening has already passed. While the Fed’s projections for 2026 show only one rate cut, which signals more caution than markets expect, bond yields and the US dollar both fell after the meeting. That reaction shows markets read the Fed’s tone as dovish.
The key takeaway is that the Fed left the door open for more easing at some point, without signaling faster cuts. This means the US dollar index is likely to move back and forth in the near term, guided closely by economic data.
US Data: Softening Employment Signal Pressures the US dollar
On the macro side, the biggest talking point was the sharp rise in weekly . Applications jumped to 236,000, up by 44,000, which raised concerns about cooling demand for labor, even though seasonal factors were highlighted. These signals reduce the US dollar’s appeal at a time when the Fed has left room for possible rate cuts ahead.
Michigan consumer confidence improved to 53.3, which helps sentiment at the margin. Even so, the level remains low and shows that domestic demand remains fragile. As a result, the market focus has shifted away from headline US growth numbers toward a broader view that growth remains steady, policy has turned more accommodative, and the US dollar’s interest advantage continues to fade.
Japan Factor: BoJ’s Possible Rate Hike Second Pressure on DXY
One of the key focus areas this week is Japan. Expectations that the Bank of Japan may raise interest rates from 0.50% to 0.75% at its December 18 to 19 meeting have strengthened the yen against the US dollar. The Tankan index also supported this view, showing an improvement in large manufacturers as the reading rose to plus 15. This reinforces the idea that the BoJ may continue tightening policy.
Because the yen carries a heavy weight in the DXY basket, the pullback has pushed the US dollar index lower. In simple terms, while US yields eased after the Fed rate cut, rising expectations of policy normalization in Japan are working against the US dollar and weighing on the DXY.
Stabilizing Effect of Europe and the UK
The ECB’s view that policy is in a good place and its lack of urgency to cut rates are helping support the euro. This, in turn, puts downward pressure on the US dollar index. In the UK, the possibility of a rate cut could weaken the pound and offer some limited support to the DXY.
Even so, the main driver for markets this week clearly remains the interaction between the US and Japan.
Technical Outlook for the US Dollar
The DXY chart shows that after a sharp fall in the first half of the year, the index has moved mostly sideways in the second half. The latest rebound stalled near 99.72, a key Fibonacci level, and then slipped back toward support around 98.48. In the short term, lower highs and fading momentum suggest that downward pressure is building.
Short-term moving averages are clustered between 99 and 99.3. This area has become a strong resistance zone. Any bounce toward this range is likely to face selling unless the index can clearly move back above it. The way these averages are compressing and sloping lower also points to continued weakness in the near term.
If we summarize the current levels for DXY;
98.48 is the main short-term support. A daily close below this level could trigger stronger selling.
If 98.48 breaks, the next downside level to watch is 96.55, which marks the base of the prior consolidation.
99.72 is the first upside hurdle. Daily closes above this level are needed for a recovery to take shape.
If 99.72 holds, the next major resistance level stands at 101.67.
Momentum indicators show that the Stoch RSI has moved into oversold territory. This suggests a short-term bounce is possible. Still, this alone does not confirm a bottom. For a clearer signal, the price needs to hold above 98.48 and move back into the 99 to 99.3 zone.
If upcoming US inflation or jobs data turns out weak, markets may believe the Fed has more room to ease policy. That would increase the risk of a break below 98.48. If this also comes alongside a more hawkish Bank of Japan and a stronger yen, any bounce in the DXY may stay limited to the 99 to 99.72 range.
On the other hand, if US data comes in strong, yields rise again, and expectations for tighter policy in Japan ease, the DXY could see a healthier recovery. In that case, a move toward 99.72 and then 101.67 would be possible.
The DXY is currently waiting for clues from surprises in US data and the interest rate gap between the US and Japan. Technically, a bounce is likely if 98.48 holds. If it breaks below that, the next target could be 96.55. The broader uptrend cannot be considered back until the index climbs above 99.72.
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Disclaimer: This article is written for informational purposes only. It is not intended to encourage the purchase of assets in any way, nor does it constitute a solicitation, offer, recommendation or suggestion to invest. I would like to remind you that all assets are evaluated from multiple perspectives and are highly risky, so any investment decision and the associated risk belongs to the investor. We also do not provide any investment advisory services.
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