The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is gaining ground after experiencing volatility and trading around 98.60 during the early European hours on Wednesday. The DXY may continue further downside for the third successive session as “Sell America” sentiment emerges amid increased trade war concerns on the United States (US)-European Union (EU) issue.
US President Donald Trump said there is “no going back” on his ambitions regarding Greenland, alongside earlier threats to impose new 10% tariffs on eight EU countries, fueling concerns over slower economic growth. Trump is scheduled to meet various stakeholders to discuss Greenland at the World Economic Forum in Davos on Wednesday.
The European Parliament plans to suspend approval of the US trade deal agreed in July, with the decision set to be announced on Wednesday in Strasbourg, France, signaling an escalation in US–Europe tensions. The European Union signaled potential duties on $93 billion of US goods, while France reportedly urged the use of the bloc’s Anti-Coercion Instrument.
The US Dollar receives support as US labor market data has pushed back expectations for further Federal Reserve (Fed) rate cuts until June. Fed officials have signaled little urgency to ease policy further until there is clearer evidence that inflation is sustainably moving toward the 2% target. Morgan Stanley analysts revised their 2026 outlook, now forecasting one rate cut in June followed by another in September, compared with their previous expectation of cuts in January and April.
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.
Source: https://www.fxstreet.com/news/us-dollar-index-steadies-around-9850-as-sell-america-sentiment-emerges-202601210755
