US Dollar Index holds gains above 97.00 as traders eye FOMC Minutes
- US Dollar Index maintains its position as traders await Wednesday’s FOMC Meeting Minutes.
- The Greenback may weaken as softer January US CPI boosts expectations of Fed rate cuts later this year.
- CME FedWatch suggests 52.7% odds of a 25-basis-point rate cut in June and 42.7% in July.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, remains stronger for the second consecutive day, trading around 97.20 during the European hours on Tuesday.
The Greenback steadies as traders adopt caution ahead of the looming Federal Open Market Committee (FOMC) Meeting Minutes due on Wednesday. Traders will shift their focus toward Q4 Gross Domestic Product Annualized and the core Personal Consumption Expenditures - Price Index data due on Friday for clearer signals on the policy outlook.
However, the Greenback may face challenges as softer January US Consumer Price Index (CPI) data reinforced expectations that the Federal Reserve (Fed) may begin cutting rates later this year. According to the CME Group’s FedWatch tool, markets now price in a 52.7% probability of a 25-basis-point rate reduction in June and 42.7% in July.
January’s US Nonfarm Payrolls recorded the largest increase in over a year, while the Unemployment Rate unexpectedly declined, pointing to a stabilizing labor market. However, sentiment remains guarded as the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) Price Index, continues to hover closer to 3% than its 2% target, with disinflation progress uneven since mid-2025.
Chicago Fed President Austan Goolsbee said last week that the latest CPI report showed both positive signs and lingering concerns, particularly elevated services inflation. Goolsbee noted that robust January jobs data point to a stable labor market with only modest cooling, and added that interest rates still have scope to move lower.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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