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US Dollar Index softens below 98.50 ahead of US NFP data

  • US Dollar Index weakens to around 98.25 in Tuesday’s early European session.
  • The US employment reports will be in the spotlight on Tuesday. 
  • Traders expect the Fed to hold interest rates steady in January 2026.

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 negative note near 98.25 during the early European trading hours on Tuesday. The DXY edges lower as traders await the release of a slew of US economic data, including the delayed November US jobs report.

The US Nonfarm Payrolls (NFP) report for October and November will be closely monitored later in the day. This report could give more clues about the US interest rate path. If the data point to a slowdown in the US labor market, this would reinforce expectations of the US Federal Reserve (Fed) rate cuts and undermine the Greenback. On the other hand, the stronger-than-expected outcome could provide some support to the US Dollar against its rivals in the near term. 

Last week, the Fed announced its third and final quarter-point rate reduction this year, cutting interest rates by 25 basis points (bps) to a target range of 3.50% to 3.75%. Markets are currently pricing in nearly a 76% chance that the US central bank will hold interest rates steady in January 2026, unchanged from a day earlier, according to the CME FedWatch tool.

New York Fed President John Williams said on Monday that monetary policy is well-positioned for next year following last week’s rate reduction, amid elevated risks to employment and somewhat-reduced inflation risk. Meanwhile, Fed Governor Stephen Miran reiterated his view that current policy remains overly restrictive. Traders will take more cues from the Fedspeak later this week for fresh impetus. Any hawkish remarks from Fed officials could boost the DXY. 

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.

Author

Lallalit Srijandorn

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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