DOLLARThe US Dollar Index (DXY) Yearly Support and Potential Sell-Off to 96 Zone: Role of 10-Year Bond Yields and Interest Rates
1. Technical Outlook: DXY Support Breakdown and 96$ Target and Critical Support Levels.
The DXY recently breached the 200-week moving average (200-WMA), a key multi-year support level, signaling a potential trend reversal .
A sustained break below 98.00 could trigger a steeper decline toward 96.00-95$ long-term uptrend ascending trendline acting as 6months support floor connecting 2008, 2011 and 2020, . However, analyst projections also highlight the 96–95 zone as a plausible target if Fed rate cuts and macroeconomic headwinds persist .
Current Context (May 2025):
The DXY is testing 98.4 on weekly charts, with bears eyeing lower supports amid weakening USD sentiment .
A drop to ascending trend line on 6months would align with forecasts tied to Fed policy shifts and global currency strength .
2. 10-Year Bond Yield and Interest Rate Dynamics
Direct Relationship with the Dollar:
The 10-year Treasury yield and USD share a strong correlation: higher yields attract foreign capital, boosting dollar demand, while lower yields weaken the currency .
As of May 2025, the 10-year yield hovers near 4.54%, down from peaks but still elevated compared to global peers .
Impact of Rate Cuts and Policy Divergence:
Fed Rate Expectations: Markets price in five Fed rate cuts by late 2025, which would reduce yield advantages and pressure the dollar .
Policy Divergence: The ECB and BoJ are expected to maintain or ease policies, while the Fed delays cuts, temporarily supporting USD. However, prolonged easing could reverse this advantage .
3. Key Drivers of Dollar Weakness Toward 96-95 ascending trendline
Bearish Factors:
Yield Decline: A drop in the 10-year yield (e.g., due to Fed cuts or recession fears) would erode USD appeal. For every 1% decline in yields, the DXY could fall 3–5% .
Risk Sentiment: A "soft landing" scenario or rally in risk assets (stocks, commodities) may reduce safe-haven USD demand .
Tariff and Geopolitical Risks: Escalating US-China/EU trade tensions could weaken the USD if global growth fears dominate .
Bullish Counterpoints:
Hawkish Fed Surprises: Strong US data (e.g., inflation, jobs) may delay rate cuts, keeping yields and the dollar elevated .
Safe-Haven Flows: Renewed geopolitical/market turmoil could revive USD demand despite lower yields .
4. Summary: Interplay Between Yields, Rates, and DXY
Factor Impact on DXY
10-Year Yield Rises Strengthens USD (investor inflows)
10-Year Yield Falls Weakens USD (capital outflows)
Fed Rate Cuts Pressures USD (narrows yield gap)
ECB/BoJ Easing Supports USD (policy divergence)
Path to 96: A combination of Fed rate cuts, declining 10-year yields, and stronger global currencies (EUR, JPY) could drive the DXY toward 96–95 .
Reversal Risks: Hawkish Fed pivots or safe-haven demand amid crises may stall the decline.
Conclusion
The DXY’s potential drop to the 96–95 zone hinges on sustained declines in the 10-year Treasury yield and Fed rate cuts, compounded by technical breakdowns. While policy divergence and safe-haven flows offer temporary USD support, broader macroeconomic shifts (e.g., tariff risks, global growth) could accelerate the sell-off. Traders should monitor yields, Fed rhetoric, and technical levels on demand floor and supply roof for confirmation of bearish or bullish momentum
