US Dollar Weekly Forecast: Trade Optimism Fuels Greenback’s Rally.

As global markets experience a sense of relief, the US dollar (USD) continues to rise, marking its fourth consecutive week of gains. The US Dollar Index (DXY) surged past the critical 100.00 threshold, peaking near 102.00 earlier this week, a stark recovery from its mid-April lows of 97.92.

This rebound, sparked by a 90-day US-China trade truce and a new US-UK trade framework, has bolstered investor sentiment and provided a lifeline to the greenback after a nearly 9% plunge between March and April.

However, skepticism lingers about the durability of these trade agreements, with analysts warning that underlying tensions could resurface. Adding to the dollar’s momentum, rising US Treasury yields and a hawkish Federal Reserve stance have created a supportive backdrop, though economic uncertainties and inflationary pressures keep markets on edge.

As the greenback navigates this volatile landscape, investors are bracing for a pivotal week of economic data and Fed commentary that could shape its trajectory.

ALSO READ | US Dollar Weekly Forecast: Trade Optimism Fuels Greenback’s Rally.

Trade Deals Spark Greenback’s Revival

A pivotal shift in US-China trade relations has been a cornerstone of the dollar’s recent strength. Following high-stakes talks in Geneva, the White House announced a 90-day trade truce, averting crippling tariffs that could have exceeded 100%.

Instead, China faces a 30% tariff increase, 20% tied to fentanyl exports and 10% linked to the so-called “Liberation Day,” while suspending retaliatory duties on US goods. This de-escalation, coupled with a new US-UK trade deal offering improved market access and partial tariff relief, has lifted risk sentiment.

However, real-time market analysis suggests caution, with economists noting that the US-UK agreement is more symbolic than transformative, and the US-China truce remains fragile.

Persistent tariffs, even at reduced levels, could still stoke inflation, with recent data showing US import prices rising 0.9% month-over-month in April 2025, the highest since March 2022.

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Federal Reserve’s Cautious Stance

The Federal Reserve’s May 7 decision to hold interest rates steady, paired with Chair Jerome Powell’s hawkish remarks, has further underpinned the dollar. Powell acknowledged economic resilience but flagged risks from trade policies and inflation, which recent data pegs at 3.1% annually, above the Fed’s 2% target.

Fed officials, including Governor Adriana Kugler and Chicago Fed President Austan Goolsbee, emphasized the challenge of interpreting economic signals amid tariff-driven import surges.

Real-time indicators show US Treasury yields hitting multi-week highs, with the 10-year yield at 4.45% as of May 16, 2025, bolstering the dollar. Yet, markets have delayed rate-cut expectations to September, reflecting uncertainty over inflation’s trajectory.

Did You Know?
The US Dollar accounts for 88% of global foreign exchange transactions, averaging $6.6 trillion daily, making it the world’s most traded currency.

Technical Outlook: DXY’s Cautious Climb

The DXY’s recovery faces technical hurdles, trading below the 200-day (104.25) and 200-week (102.79) Simple Moving Averages, signaling potential bearish pressure. A break above the May 12 high of 101.95 could target the 55-day SMA at 102.10, with the 200-day SMA as the next hurdle.

Downside risks linger, with the 2025 low of 97.92 and the March 2022 trough at 97.68 in sight. Momentum indicators are mixed, with the Relative Strength Index above 52 and the Average Directional Index at 32, suggesting a strengthening but cautious trend.

What Lies Ahead?

Next week’s Federal Reserve speeches and preliminary PMI data for manufacturing and services will be critical. Trade developments, particularly US-China negotiations, could sway sentiment.

Recent data highlights rising consumer inflation expectations, with the New York Fed’s survey showing one-year expectations at 3.3%, up from 3.0%. Any breakthroughs or setbacks in trade talks could amplify volatility, making the greenback’s path a focal point for investors.