The U.S. Dollar Index (DXY) recently faced significant pressure, closing at 97.254 just above its three-year low of 96.997. This decline resulted from a combination of factors including easing geopolitical tensions, a shift in Federal Reserve policy expectations, and growing concerns about stagflation. Despite a hotter-than-expected core PCE reading, the dollar’s traditional safe-haven appeal diminished, leaving the index vulnerable to further declines.
One key factor contributing to the dollar’s weakness was the reduction in Middle East tensions following a ceasefire agreement. This development led to a 6% drop in Brent crude prices to $67.14, removing the safe-haven premium that had been supporting the dollar. Risk-on sentiment prevailed in financial markets as the S&P 500 reached record highs at 6,173, while gold prices fell 1.65% to $3,273.67/oz, indicating reduced demand for crisis hedging assets. Investors redirected capital toward higher-yielding equities and technology sectors, further weakening the dollar’s support.
Economic data showed mixed signals, with core PCE rising 0.2% month-over-month (2.7% year-over-year), exceeding expectations. However, personal income fell 0.4% and spending declined 0.1%, suggesting underlying economic fragility. Market participants interpreted these figures as evidence of stagflation driven by tariff impacts rather than healthy demand-driven inflation. Despite improved consumer sentiment readings at 60.7, the decline in income and spending limited the dollar’s ability to rally on inflation signals.
The Federal Reserve’s policy outlook also contributed to dollar weakness. Fed Vice Chair Bowman’s dovish comments on June 23 and Chair Powell’s testimony on June 25 opened the door to potential policy easing. This shift increased market expectations for a July rate cut to 25% and projected year-end cuts at 65 basis points. The dovish tilt reduced the dollar’s carry advantage despite stable Treasury yields (10-year at 4.39%, 2-year at 3.3%, 30-year at 4.85%). The bull steepening in Treasuries and reduced Fed funds expectations weakened traditional dollar-yield support, further pressuring the DXY.
Currency movements also contributed to the dollar’s decline. EUR/USD rose to 1.1754 as the European Central Bank signaled nearing the end of its rate-cut cycle. USD/JPY dropped to 143.749, reflecting yen strength from safe-haven flows. The DXY traded below its 50-week and 100-week simple moving averages, breaking key support levels without any bullish reaction, reinforcing market conviction toward a bearish dollar outlook.
— news from FXEmpire