US Dollar Index advances toward 98.00 despite rising trade uncertainty
- US Dollar Index may weaken as foreign investors shun dollar assets amid rising trade uncertainty.
- Trump’s administration considers new security tariffs on six industries after the Supreme Court voided several levies.
- Fed’s Waller said March FOMC rate-cut support hinges on February labor market data.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, edges higher after two days of losses and is trading around 97.80 during the Asian hours on Tuesday. Traders will likely monitor the US ADP Employment Change four-week average later in the day, alongside remarks from Federal Reserve (Fed) officials.
The Greenback could further face challenges as foreign investors avoid dollar assets amid escalating trade uncertainty. US President Donald Trump’s administration is considering new national security tariffs on half a dozen industries after a Supreme Court ruling last week struck down several of his second-term levies. The measures would be enacted under Section 232 of the Trade Expansion Act of 1962 and would be separate from the 15% global tariff announced on Saturday, according to The Wall Street Journal.
In response, the European Union (EU) signaled it could pause ratification of its trade agreement with the United States (US). Questions also remain about the longevity of the new tariffs, as Congress is unlikely to extend them beyond the 150-day window. Separately, India and the US have postponed a scheduled three-day meeting to finalize the interim trade pact, as Washington reassesses its broader tariff strategy.
Fed Governor Christopher Waller said his decision on backing a rate cut at the March Federal Open Market Committee (FOMC) meeting will depend on February labor market data. Swaps markets currently price in just a 5% probability of a 25-basis-point cut in March.
Looking ahead, the US Dollar may face additional headwinds as markets expect the FOMC to deliver around 50 basis points (bps) of rate cuts in 2026, while the Bank of Japan (BoJ) is projected to raise rates by another 25 bps and the European Central Bank (ECB) is expected to keep policy unchanged in 2026.
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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