US Dollar Index declines to near 97.00 amid Fed uncertainty, US shutdown fears
|- US Dollar Index remains under selling pressure around 97.00 in Tuesday’s Asian session.
- Trump will soon nominate a new US central bank chief, raising concerns about the Fed’s independence.
- Financial markets expect the Fed to hold interest rates steady at its January meeting on Wednesday.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, trades on a weaker note near 97.00 during the Asian trading hours on Tuesday. The US ADP Employment Change and Consumer Confidence reports are due later on Tuesday.
Worries about the Federal Reserve (Fed) independence have dragged the DXY down to its lowest since September 18, 2025. US President Donald Trump said last week that he would soon announce his pick for the next Fed chair to replace Chair Jerome when his term expires in May. Betting markets pegged BlackRock Executive Rick Rieder as the front-runner, according to Reuters.
"It's not possible to view the actions of the next Fed chair as separate from the economic environment or their ability to influence other FOMC (Federal Open Market Committee) participants," said Tim Duy, chief U.S. economist with SGH Macro Advisors.
Furthermore, a looming US government shutdown might contribute to the USD’s downside. The US government is heading for a partial shutdown as the top Democrat in the US Senate, Chuck Schumer, vows to oppose a funding package that includes appropriations for the Department of Homeland Security. Congress faces a January 30 deadline to fund the government or risk a partial government shutdown.
The US Fed is widely expected to hold interest rates steady at its policy meeting on Wednesday, following three consecutive cuts at the end of 2025. Traders will closely watch the press conference as it might offer some hints about the US economic outlook and interest rate path. Any hawkish comments from Fed officials might help limit the USD’s losses in the near term.
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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