**US Dollar Weekly Forecast: Tariffs and Fed Cloud the Outlook**
*Adapted from the original work by David Cottle for FXStreet*
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The US Dollar turned sharply lower last week after official data revealed a more pronounced cooling in inflation than widely anticipated, raising investors’ hopes that the Federal Reserve might move sooner on interest rate cuts. However, the greenback’s outlook remains complicated by political developments, international trade policy, and ever-evolving monetary expectations.
This detailed weekly forecast explores the crosscurrents currently shaping the US Dollar’s path, focusing on the impact of tariffs, the Federal Reserve’s stance, and broader macroeconomic dynamics.
## Inflation Data Shakes Dollar Fundamentals
A critical driver of the Dollar’s correction was the May Consumer Price Index (CPI), which surprised to the downside:
– **Headline annual inflation** cooled from 3.4 percent to 3.3 percent.
– **Core inflation** (excluding food and energy) slipped as well, pointing to a slow but continued normalization after months of sticky price pressures.
The CPI print landed just ahead of the June Federal Reserve policy meeting, leading markets to recalibrate expectations about the timing and pace of US rate cuts. For months, the Fed had stressed the need for further progress on inflation before easing policy. The inflation report finally provided tangible evidence that earlier rate hikes are working their way through the economy.
In response:
– The Dollar Index (DXY) retreated from recent highs.
– Treasury yields fell, especially at the short end, pricing in increased odds of a September cut.
Yet, this data point does not mark a clear turning point for the greenback. Policymakers and traders alike recognize that a single positive report does not guarantee a persistent trend, particularly in an environment where supply shocks and labor market resilience complicate the inflation outlook.
## Federal Reserve: From Patience to Caution
The June Federal Reserve meeting left rates unchanged, as universally expected, but the prose and projections revealed subtle yet significant shifts:
– **“Dot plot” forecasts**: The median expectation among policymakers now signals just one rate cut in 2024. This was a hawkish surprise relative to market hopes for two cuts—down from three projected in March.
– **Jerome Powell’s remarks**: The Fed chair maintained that “inflation has eased substantially but remains elevated,” and that further evidence of progress is required before changing course. However, Powell acknowledged that inflation is no longer “moving sideways,” a nod to the improvement in May.
Initial reactions saw the Dollar attempt a recovery, but as the dust settled, the overarching view is that while the door to easing remains open, policymakers are not yet ready to step through. The Fed continues to walk a tightrope between the risks of persistent inflation and a downturn triggered by restrictive policy.
**What the new Fed stance means for the Dollar:**
– A delay in cuts supports the Dollar against low-yielding peers like the euro and yen, especially as other central banks have already begun to ease (European Central Bank in June, Bank of Canada, etc.).
– However, softer data in the coming weeks (including PCE inflation, employment numbers, or retail sales) could force a dovish pivot, reigniting Dollar weakness.
## Politics and Tariff Policy: New Uncertainty on the Horizon
Monetary policy is not the only game in town for Dollar-watchers. The looming US Presidential election and recent trade policy announcements have added new twists to the outlook:
– The Biden administration **announced higher tariffs on Chinese imports** in sectors such as electric vehicles, solar cells, and semiconductors. This marks a notable escalation in trade tensions reminiscent of the 2018-2019 era.
– Election-year rhetoric from both major parties strongly signals more protectionist moves ahead, regardless of November’s outcome.
The potential macroeconomic impacts of new tariffs are twofold:
1. **Short-term Dollar support:** Barriers to imports could temporarily boost domestic
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