Dollar Dominance Returns as Liquidity Squeeze Undermines Gold

Key Takeaways:

*The U.S. Dollar surged as global risk-off sentiment intensified amid the prolonged U.S. government shutdown and fading Fed rate-cut expectations.

*Powell’s comment that a December rate cut is “not a given” led markets to scale back easing bets, supporting the dollar’s upward momentum.

*Despite heightened uncertainty, gold prices fell as traders sold positions to raise cash and meet margin calls amid widespread losses in equities.

Market Summary: 

The U.S. Dollar regained dominance across global markets as risk-off sentiment deepened, fueled by renewed political and policy uncertainty in Washington. Prolonged negotiations over the U.S. government shutdown, coupled with speculation that the Federal Reserve may delay further easing, triggered a broad wave of de-risking. Investors scaled back positions in high-beta assets such as equities and cryptocurrencies, driving safe-haven flows back into the greenback. Fed Chair Jerome Powell’s latest remarks, emphasizing that a December rate cut is “not a given,” prompted traders to sharply reduce bets on policy easing, pushing the dollar to a four-month high versus the euro and anchoring it firmly as the preferred refuge amid global volatility.

The greenback’s resilience reflects both policy recalibration and market liquidity dynamics. As global asset prices tumbled, investors faced margin pressures and widespread forced liquidations  prompting a rush into cash and highly liquid assets. The dollar, benefiting from its reserve currency status, became the natural destination for capital preservation. U.S. Treasury yields held relatively stable, suggesting that haven flows were not merely speculative but rooted in structural caution over fiscal and monetary direction. The combination of a firmer dollar and tighter financial conditions has amplified market stress, particularly in risk-sensitive assets, while reinforcing the perception that the Fed’s next move may not be toward easing as quickly as previously anticipated.

Gold, traditionally a beneficiary of turmoil, struggled to capitalize on the broader flight to safety. Instead, the metal faced heavy selling as traders unwound leveraged positions to meet margin calls elsewhere, undermining its haven appeal. The liquidation-driven move has distorted the usual inverse correlation between gold and risk sentiment, leaving the metal vulnerable even as equity markets and crypto assets extended steep declines. The stronger dollar compounded the pressure, making gold more expensive for non-dollar buyers and accelerating outflows from exchange-traded funds and speculative longs.

In the near term, both assets remain at the center of a delicate macro recalibration. The dollar’s trajectory will hinge on the evolution of U.S. fiscal negotiations and incoming inflation data, while gold’s recovery depends on the stabilization of broader market liquidity and risk sentiment. Should the Fed strike a more dovish tone or the shutdown risk ease, the dollar’s upward momentum could moderate offering gold a reprieve. However, as long as global markets remain in a deleveraging cycle with cash demand high, the greenback is likely to stay bid, leaving gold under persistent downward pressure despite its underlying safe-haven credentials.

Technical Analysis

DOLLAR_INDX, H4

The DXY chart shows a strong bullish structure, with prices extending higher within an established uptrend. The index has broken decisively above the 99.80 resistance zone and is now testing the key psychological level around 100.20, its highest point in recent sessions.

Price action remains supported by the 20- and 50-period moving averages, which are both sloping upward and show a sign of sustained momentum. The RSI has climbed to around 71, indicating that the dollar is entering overbought territory, hinting at the potential for short-term consolidation or a mild pullback before any further upside.The MACD continues to show positive momentum, with its histogram in green and the signal line maintaining a bullish crossover. However, the upward momentum appears to be flattening slightly, suggesting that buying pressure may be losing steam near the 100.20 resistance.

Overall, the trend bias remains bullish, but a short-term correction could occur before further continuation higher.

Resistance Levels: 100.25, 101.10
Support Levels: 99.50, 98.80

GOLD, H4

The XAU/USD chart reveals a clear bearish pattern following a double-top formation around the $4,450 region shows a strong reversal signal that marked the end of gold’s prior uptrend. After breaking below the key ascending trendline, the metal has continued to trade lower, with successive lower highs and lower lows defining a short-term downtrend.The 20- and 50-period moving averages are sloping downward and acting as dynamic resistance, suggesting that bearish momentum remains intact.

Momentum indicators reinforce the cautious tone: the RSI sits around 37, reflecting weak buying interest and room for further downside before gold becomes oversold. Meanwhile, the MACD has just turned negative again, with the signal line crossing below the MACD line showing a renewed bearish crossover that points to increasing downward momentum.

Resistance Levels: 4035.00, 4135.00
Support Levels: 3920.00, 3840.00