US Dollar Weekly Forecast: Focus now shifts to the Fed

The US Dollar is quietly regaining momentum. With global tensions flaring up again, the dollar is once more proving its worth as a safe haven for investors around the globe.

After several weeks of uneven trading, the Greenback has now posted two consecutive weekly gains, with the US Dollar Index (DXY) pushing back above the psychologically important 100.00 level for the first time since late December.

The dollar's ascent wasn't a sudden event, nor could it be pinned down to a single cause. This predicament stems from a confluence of circumstances. Global political dynamics, the upward trajectory of interest rates in the US, and shifting perceptions of the Federal Reserve's manoeuvres all play a role.

Safe-haven demand is back

This recent dollar rally has coincided with ongoing tensions in the Middle East, which have nudged investors towards familiar, defensive investments. During times of geopolitical turmoil, the US currency frequently gains as global capital seeks both liquidity and security.

Simultaneously, US Treasury yields have risen across the board, bolstering the Dollar's attractiveness.

Part of that yield rebound reflects growing speculation that inflation could rise again, particularly as energy prices respond to geopolitical tensions. Should Oil and Gas prices stay high, the disinflation story that had started to take hold in the markets earlier this year might get more complicated.

The Fed is in no hurry

Against that backdrop, the Federal Reserve continues to adopt a cautious stance.

The central bank left its policy rate unchanged at 3.50%-3.75% in January, a decision that came as no surprise to markets. More interesting was the tone: policymakers appeared broadly comfortable holding policy steady while monitoring incoming data.

The minutes from that meeting reinforced the message. Most officials favoured patience, with only a small minority supporting a rate cut.

For now, the Fed appears firmly in wait-and-see mode. And while Fed officials haven’t had the chance to comment on the recent developments in the energy markets due to the blackout period, it is obvious that the spike in Oil prices will likely push officials further away from immediate rate cuts.

Markets expect policymakers to leave rates unchanged again at the March 18 meeting, while pricing only roughly 24 basis points of easing by the end of the year.

Fed officials disagree on the path ahead

Comments from Fed officials before the blackout period began highlight how uncertain the outlook remains.

John Williams, President of the New York Fed and a permanent voter on the Federal Open Market Committee, said the economy remains on a solid footing and that rate cuts could still be appropriate if inflation continues to moderate.

He expects growth around 2.5% this year, supported by fiscal spending, favourable financial conditions and continued investment in artificial intelligence. Williams also suggested that tariff-related inflation pressures could fade later in the year.

But others are more cautious

Kansas City Fed President Jeffrey Schmid warned that inflation remains too high and that demand continues to outpace supply in parts of the economy, particularly in services.

Minneapolis Fed President Neel Kashkari acknowledged that the current tensions surrounding Iran have injected a dose of unpredictability into the economic forecast. Though he had initially anticipated a rate cut this year, he's now inclined to pause, observing how geopolitical events will shape the economic data.

Cleveland Fed President Beth Hammack expressed a similar view, advising that policymakers should proceed carefully while inflation continues to exceed the desired threshold.

By contrast, Governor Stephen Miran took a more dovish view, arguing that several rate cuts may still be appropriate this year. While higher Oil prices could push headline inflation higher, he noted that energy shocks historically have had limited effects on core inflation.

Other policymakers emphasised the uncertainty of the moment. Richmond Fed President Tom Barkin warned that the Fed’s decision-making could become more complex if inflation pressures and economic slowing emerge at the same time.

San Francisco Fed President Mary Daly similarly highlighted two-sided risks. A softer labour market could justify easing, she said, but persistent inflation and rising energy prices mean the Fed should avoid moving too quickly.

Inflation is cooling, but not comfortably

Inflation has improved compared with the peaks seen in recent years, but it remains above the Fed’s target.

The Consumer Price Index rose 2.4% YoY in February, while core inflation came in at 2.5%.

The Fed’s preferred gauge, the Personal Consumption Expenditures (PCE) price index, showed inflation running at 2.8% YoY, still noticeably above the central bank’s 2% goal.

That momentum has helped sustain the disinflation story in the markets, though officials are still keeping a close eye on things.

Some of the worry stems from tariffs, the complete effect of which on what consumers pay is still a bit of a mystery. Energy markets also pose a threat.

Should geopolitical frictions keep driving up Oil prices, the costs of fuel and transportation could rapidly seep into wider inflation indicators.

Positioning shows renewed Dollar scepticism

Interestingly, positioning data suggest investors remain cautious about the Dollar’s rally.

Speculative traders, according to the most recent figures from the Commodity Futures Trading Commission, are still holding a net short position on the US Dollar. During the week ending March 3rd, net shorts increased, reaching roughly 5K contracts.

Open interest climbed to roughly 30K contracts. This suggests that the recent change in positioning is due to new trades being placed, rather than just a closing out of current positions.

In other words, while the Dollar has strengthened recently, speculative traders still maintain a modest bearish bias toward the currency.

What to watch next

The coming week could prove important for markets.

The Federal Reserve will hold its next policy meeting and release updated economic projections along with the closely watched dot plot, which provides insights into policymakers’ interest rate expectations.

Beyond the Fed, investors will also monitor US producer prices and labour market data, both of which could influence expectations around the policy outlook.

Bottom line

The Dollar’s latest rally reflects a combination of forces.

Stronger US data earlier in the year, a steadier tone from the Fed and rising geopolitical tensions have all helped support the Greenback. The move gained additional traction after President Trump nominated Kevin Warsh as Jerome Powell’s successor, a choice markets interpreted as potentially less dovish than expected.

The big question now is whether the easing of inflation will persist.

Should inflation persist, or if energy prices spike, the markets might swiftly recalibrate their forecasts for substantial interest rate reductions.

In that case, the Federal Reserve would likely take a more cautious stance. And this patience could continue to strengthen the value of the United States Dollar.