Dollar Trend Forecast: Dollar Index Falls Below 97.0 to 4-Year Low, Will the Dollar Continue to Fall or Bottom Out in 2026?

TradingKey - January 2026, U.S. Dollar The index continued its downward trend from 2025, officially breaking below the key 97.0 level and reaching a low of 95.5, marking a near four-year low since February 2022.

This movement not only shattered market expectations for a "temporary stabilization" of the greenback but also triggered a chain reaction across global financial markets. Gold prices approached the $5,600 mark at one point, while non-U.S. currencies such as the Euro and RMB strengthened across the board. Emerging market equities saw capital inflows, and commodity prices recovered in tandem.

For young investors and financial enthusiasts, every fluctuation in the U.S. Dollar Index (DXY) is closely tied to asset allocation and investment returns.

Will the U.S. Dollar Index continue to slide in 2026? Will the Federal Reserve cut interest rates in 2026? Will gold, crude oil, and other commodities still offer investment opportunities? Will the performance of U.S. and emerging market stocks be weighed down by the dollar?

What were the reasons for the dollar's weakness in January 2026?

The U.S. Dollar Index's breach of the 97.0 level and its four-year low in January 2026 were not caused by a single factor. The pivot in Fed policy, accelerating global de-dollarization, geopolitical disruptions, and pressure on U.S. economic fundamentals all served as catalysts for the decline.

Rising Fed rate cut expectations: The dollar's interest rate advantage vanishes.

In 2025, the Federal Reserve completed three rate cuts, lowering the federal funds rate from the 4.75%-5.00% range to 3.25%-3.50%, initiating a new easing cycle.

By January 2026, statements from Fed officials further signaled "continued rate cuts," completely shattering market expectations for a "slower pace of cuts" and directly leading to a decline in the attractiveness of dollar-denominated assets.

The latest Fed meeting minutes show that current indicators suggest job growth remains low, and the unemployment rate has shown signs of stabilizing. Inflation remains elevated. The Committee is committed to achieving maximum employment and a long-term inflation rate of 2%. The uncertainty regarding the economic outlook remains high.

Fed Chair Jerome Powell stated at a press conference that the Fed is well-positioned to address the risks to its dual mandate. He noted it is difficult to conclude from recent data that policy is clearly restrictive, and they will monitor key objective indicators, letting the data guide the way.

According to CME FedWatch data, the probability of the Fed holding rates steady in January was 97.2%, with a 2.8% chance of a 25-basis-point cut. By March, the probability of a cumulative 25-bps cut was 15.5%, while the probability of keeping rates unchanged was 84.1%.

The cumulative rate cuts by the Fed are expected to reach 100 basis points, far exceeding the 75 basis points anticipated at the end of 2025.

The vanishing interest rate advantage directly led to international capital outflows from dollar assets. In January 2026, global capital saw a net outflow of $18 billion from the U.S. Treasury market and $22 billion from the U.S. stock market. Significant capital shifted to the Eurozone and emerging markets where interest rates are relatively higher, further intensifying downward pressure on the dollar.

Political pressure from the Trump administration on the Fed also became a significant driver. Recently, Trump has repeatedly called for the Fed to "accelerate the pace of rate cuts to stimulate economic growth," raising concerns about the central bank's independence and further shaking market confidence in the dollar.

U.S. economic fundamentals under pressure, growth momentum weakens.

U.S. manufacturing remains weak, with the January ISM Manufacturing PMI recorded at 47.8, below the expansion-contraction threshold for five consecutive months. Declines in new orders and production indices have heightened market fears of a recession.

The labor market is cooling. The Bureau of Labor Statistics released the December 2025 nonfarm payroll report. In December 2025, U.S. seasonally adjusted nonfarm payrolls increased by 50,000, below the median forecast of 60,000 and the previous increase of 64,000. The unemployment rate was 4.4%, compared to expectations of 4.5% and a previous reading of 4.6%.

The U.S. debt crisis continues to ferment, with federal debt exceeding $37 trillion, or over 130% of GDP. In January, the auction yield for 30-year Treasury bonds rose as demand for U.S. debt fell, weakening the dollar's credit backing.

Accelerating global de-dollarization impacts the foundation of hegemony.

The de-dollarization process accelerated in January 2026: BRICS nations announced they would increase the share of internal trade settled in local currencies from 35% to 50%; ASEAN plans to establish a regional unified payment system by 2027 to reduce reliance on the dollar; and the share of local currency settlement in Brazil-China bilateral trade reached 40%, up 10 percentage points from last year.

Regarding foreign exchange reserves, global central banks net sold $48 billion in dollar reserves in January, with the dollar's share of reserves falling to 58.2%, a new low since 1995. Meanwhile, they net purchased 150 tons of gold, bringing gold's share of reserves to 12.5%, surpassing U.S. Treasuries as the primary reserve asset for the first time. The central bank of Poland also plans to purchase an additional 150 tons of gold.

Geopolitical and market sentiment disruptions exacerbate the dollar's downward volatility.

In January 2026, a complex and volatile global geopolitical landscape, combined with fermenting bearish market sentiment, further exacerbated the dollar's downward volatility. On one hand, short-term safe-haven demand from the Middle East and the Russia-Ukraine conflict briefly supported the dollar. However, uncertainty in U.S. policy, such as escalating trade frictions, led the market to view the dollar itself as the primary risk, significantly weakening its safe-haven support.

In mid-January, the Trump administration issued tariff threats to European allies over issues related to Greenland. This move was interpreted by the market as pushing trade tools to the brink of extreme "weaponization," directly touching upon the sensitive issue of national security and sovereignty.

Analysts defined this market reaction as a recurrence of the "dollar credit rupture trade." Although Trump announced a framework agreement with NATO during the Davos Summit and officially withdrew the previous tariff threats, leading to a brief market rebound, the damage from the initial shock was irreparable, and the U.S. Dollar Index failed to climb back above the 98.0 level.

What factors influence the movement of the U.S. Dollar Index?

The movement of the U.S. Dollar Index does not exist in isolation; it is influenced by multiple factors including economic fundamentals, monetary policy, global capital flows, geopolitics, market sentiment, and commodity prices. These factors interact and constrain each other, collectively determining the index's short-term fluctuations and long-term trends.

For young investors, mastering these influencing factors is essential to better anticipate dollar trends, mitigate investment risks, and seize opportunities.

U.S. Economic Fundamentals

Economic fundamentals determine the long-term trend of the dollar, with four core indicators to watch: GDP growth (U.S. GDP grew 1.8% in 2025 as the DXY fell 9.4%; January 2026 growth is expected at 0.2% MoM), inflation data (January Core PCE rose 2.4% YoY, supporting rate cuts and weighing on the dollar), employment data (January nonfarm payrolls missed expectations, dragging down the dollar), and fiscal debt (high debt levels weaken the dollar's creditworthiness).

Federal Reserve Monetary Policy

Fed monetary policy directly determines dollar interest rates and liquidity. A hawkish stance (rate hikes, quantitative tightening) pushes the dollar higher, while a dovish stance (rate cuts, quantitative easing) weighs it down. For instance, rate hikes of 525 basis points in 2022-2023 pushed the DXY to 106, while 75 basis points of cuts in 2025 saw the index drop 9.4%. Forward guidance (official statements, meeting minutes) also directly influences market expectations.

Global Capital Flows

The profit-seeking nature of capital directly affects dollar supply and demand. In January, net outflows of global capital from U.S. Treasuries and stocks exacerbated the dollar's depreciation. Regarding interest rate differentials, the U.S.-Europe spread narrowed to 0.25 percentage points in January 2026, driving capital into the Eurozone. As for safe-haven capital, when risks within the U.S. rise, flight-to-safety flows shift toward gold rather than the dollar.

Geopolitics and Global Landscape

Geopolitical situations influence the dollar through three main channels: safe-haven sentiment (the dollar benefits from flight-to-safety when the U.S. is not involved in the tension), global trade (the U.S. trade deficit expanded to $68 billion in January, weighing on the dollar), and energy prices (Brent crude fell 7.7% in January, dragging down U.S. energy exports and the dollar).

Market Sentiment and Technicals

When bearish sentiment is strong, investors sell off the dollar, magnifying its decline. Technical breaks of key support or resistance levels can trigger programmatic trend-following; in January 2026, the dollar's breach of the 97.0 support level triggered a wave of momentum selling.

What is the U.S. Dollar Index? What is it composed of?

For young investors and financial enthusiasts, to anticipate dollar movements, one must first clarify a core question: what exactly is the U.S. Dollar Index? How is it calculated? Which currencies comprise it?

The U.S. Dollar Index is a weighted geometric mean of the dollar's value relative to a basket of non-U.S. currencies. It serves as a comprehensive reflection of the dollar's relative strength in global foreign exchange markets and is one of the most influential exchange rate indicators in global finance.

Definition of the U.S. Dollar Index

The U.S. Dollar Index (abbreviated as USDX), also known as the "Dollar Strength Index," was introduced by the Intercontinental Exchange (ICE) in 1973. It is used to measure the change in the comprehensive value of the U.S. dollar relative to a basket of selected non-U.S. currencies. Simply put, the index acts as a "report card" for the dollar—it determines whether the greenback has strengthened or weakened by comparing its exchange rate movements against other major currencies.

The US Dollar Index (USDX) is a weighted index that measures the value of the US dollar relative to a basket of foreign currencies, with a base value of 100 (March 1973). A value above 100 indicates dollar strength, while a value below 100 indicates weakness (standing at 96.5 on January 30, showing weakness). Its currency basket consists of six currencies, with weights determining their level of influence:

It should be noted that the USDX does not cover all foreign currencies; rather, it selects the six currencies with the closest trade ties to the U.S. and the greatest influence. Therefore, it primarily reflects the relative strength of the US dollar against the currencies of developed Western economies.

Composition of the US Dollar Index

The core of the USDX composition is a "basket of currencies," which includes six currencies: the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc.

The weights of these six currencies were determined based on the trade volume between the U.S. and its major trading partners in 1973. Although adjusted in 1999 when the Euro replaced several European currencies, the basket remains dominated by Western economies.

The Euro is the currency with the highest weight in the USDX, accounting for over half (57.6%). Consequently, changes in the EUR/USD exchange rate have the most significant impact on the index.

The Japanese Yen is the second most weighted currency at 13.6%, and its influence on the USDX is second only to the Euro. As Japan's legal tender, and with Japan being one of the United States' major trading partners, the Yen is also one of the world's primary safe-haven currencies. During periods of geopolitical tension, the Yen often strengthens, which in turn weighs on the USDX.

The British Pound is the third most weighted currency at 11.9%, and fluctuations in the GBP/USD exchange rate also have a noticeable impact on the index. As the legal tender of the UK, a traditional ally of the U.S. with close trade and financial ties, the UK's economic fundamentals and the Bank of England's monetary policy directly affect the Pound's trend, subsequently impacting the USDX.

Why Follow the US Dollar Index?

Many young investors wonder: if I don't trade forex or hold US dollar assets, why should I care about the USDX? In fact, the USDX is not only a "bellwether" for global financial markets but also a core indicator closely linked to every investor's asset allocation, investment returns, and daily life.

Whether you invest in stocks, funds, gold, or crude oil, or purchase imported goods, travel abroad, or study overseas, fluctuations in the USDX will affect you.

For investors, USDX fluctuations directly impact the price trends of various assets, particularly core investment categories like forex, gold, commodities, stocks, and funds. Following the index helps you mitigate risks, seize investment opportunities, optimize asset allocation, and improve investment returns.

For the General Public: Impact on Daily Life and Consumption

Even if you do not make any investments, fluctuations in the USDX affect your daily life and consumption.

Many imported goods (such as imported cars, cosmetics, maternal and child products, luxury goods, and electronics) are priced in US dollars. Fluctuations in the USDX influence the domestic prices of these imported products.

When the dollar weakens, the cost for companies to import goods decreases. Consequently, the domestic prices of imported goods fall, making them cheaper for the average consumer.

When the dollar strengthens, the cost for companies to import goods increases, leading to higher domestic prices for imported goods and making them more expensive for consumers.

Traveling and Studying Abroad: A Weaker Dollar Lowers Costs

If you plan to travel or study abroad, fluctuations in the USDX will directly impact your costs:

When the dollar weakens, the RMB exchange rate against the US dollar rises.

When the dollar strengthens, the RMB exchange rate against the US dollar falls. Exchanging for the same amount of US dollars requires more RMB, thereby increasing the cost of traveling or studying abroad. For example, in 2022, when the USDX rose 8.3% and the RMB fell from 6.3 to 6.9 against the dollar, it cost an additional 6,000 RMB to exchange for 10,000 USD, significantly increasing the costs for studying and traveling.

Cross-border Shopping: A Weaker Dollar Offers Better Value

With the rising popularity of cross-border e-commerce, many people purchase overseas goods through international websites or shopping agents. Most of these goods are priced in US dollars, and USDX fluctuations affect the cost of these purchases:

When the dollar weakens and the RMB exchange rate against the dollar rises, the same amount of RMB can buy more dollar-denominated goods, making cross-border shopping more cost-effective.

How Does Federal Reserve Monetary Policy Affect the US Dollar?

The Federal Reserve's monetary policy is the most critical factor affecting short-term USDX trends and is the core variable determining the dollar's direction.

As the central bank of the United States, every interest rate adjustment, policy statement, and set of meeting minutes from the Fed triggers significant volatility in global financial markets, directly impacting the supply and demand for the dollar and market expectations, thereby determining its trend.

For young investors, predicting the dollar's movement requires a deep understanding of the mechanisms by which Fed policy affects it. How exactly do interest rate hikes, cuts, and quantitative easing or tightening influence the dollar?

The Federal Reserve primarily uses three core policy tools to influence the dollar: the federal funds rate, quantitative easing (QE)/quantitative tightening (QT), and forward guidance. These tools work in tandem to regulate dollar liquidity and interest rate levels, thereby driving the dollar's trend; they are the Fed's "three primary levers" for managing the currency.

Rate hikes raise the federal funds rate, pushing up Treasury yields and widening the interest rate differential between the U.S. and other economies. This attracts global capital into dollar assets, boosting demand and the exchange rate. Rate cuts have the opposite effect as differentials narrow, leading to capital outflows. Market expectations are often more sensitive than actual policy; adjustments in expectations triggered by the "dot plot," official speeches, and inflation data are reflected in the dollar's trend in advance.

Quantitative easing (QE) injects base money by purchasing Treasuries and MBS, increasing the dollar supply and diluting its value, which typically weighs on the currency. Quantitative tightening (QT) withdraws liquidity by halting reinvestments or selling assets, reducing the dollar supply and providing support. For instance, the USDX weakened periodically during the Fed's unlimited QE period in 2020.

Forward guidance is the Federal Reserve's third major monetary policy tool alongside interest rates and balance sheet adjustments. Its core function is to convey the future direction of policy (hikes, cuts, maintaining rates, and the pace of balance sheet operations) to the market through clear and predictable language. By guiding expectations, anchoring rate levels, and influencing economic behavior in advance, it indirectly drives the dollar. Compared to actual policy implementation, the transmission effect of expectations from forward guidance often reflects in the forex market earlier and more intensely, making it a key tool for analyzing dollar trends.

2026 US Dollar Trend Forecast: Will the USDX Continue to Fall?

For young investors and forex novices, the 2026 trend of the US dollar will be a "bellwether" for global financial markets—directly impacting cross-border investment returns and overseas study costs, and even affecting commodities (gold, crude oil) and emerging market asset prices.

The pace of the Federal Reserve's interest rate cuts in 2026 will be the "primary variable" affecting the dollar. As the U.S. labor market cools and inflationary pressures gradually ease—with core PCE remaining at a high of 2.8% year-on-year in January 2026 but showing a downward trend—the Fed's policy focus has shifted from "fighting inflation" to "preventing recession," signaling the clear start of an easing cycle.

The Federal Reserve is highly likely to embark on "gradual rate cuts" in 2026. Major investment banks, including Citi, Morgan Stanley, and Goldman Sachs, forecast that the Fed will cut rates by a cumulative 50 basis points in the first half of 2026, with the total reduction for the year potentially reaching 75-100 basis points. The specific pace will depend on the speed of disinflation and economic data.

The Federal Reserve's leadership may see a transition in 2026, with the candidate favored by President Trump for the next chair widely viewed as leaning toward maintaining low interest rates. This would further reinforce market expectations of a long-term dovish Fed, putting sustained downward pressure on the dollar—after all, rate cuts reduce the attractiveness of dollar assets, prompting global capital outflows and weighing on the exchange rate.

"De-dollarization" is no longer a new topic, but the trend is expected to deepen in 2026, exerting long-term structural pressure on the greenback. As confidence in the dollar's creditworthiness is impaired, central banks and private investors are increasingly turning to gold as a core asset to hedge against dollar risk.

Spot gold prices surged over 70% in 2025, marking their best annual performance in decades. This trend of "dumping dollars for gold" is likely to continue in 2026, with both Goldman Sachs and JPMorgan predicting that gold prices will climb further, reflecting market skepticism toward dollar assets.

In its 2026 Global FX Outlook, Goldman Sachs explicitly noted that the dollar will experience a "differentiated decline" rather than a continuation of the broad weakness seen in 2025. While the weakening of the U.S. economic advantage will lead to long-term dollar softness, the decline in 2026 is expected to be more gradual. The USDX is projected to retreat to the 98-100 range by year-end 2026, with an annual decline of approximately 3-5%.

Deutsche Bank's forecast aligns with the consensus from a Bloomberg survey, suggesting the USDX will fall by another 3% in 2026 to close the year around 99. The core logic hinges on Fed rate cuts, more balanced global economic growth, and pressure from the dollar's stretched valuation.

Drawing on market dynamics from early 2026, the UBS Global Wealth Management team posits that "a weak dollar and high volatility" will be the dominant theme for the year. Concerns over dollar credit and global liquidity will drive capital out of dollar assets toward emerging markets and European assets. The USDX is expected to exhibit a "volatile downward" trend throughout the year, trading in a range of 97-103 and projected to close at 98 by year-end.