US Dollar Index Struggles Above 98 Amid Expectations of More Fed Rate Cuts in 2026
The US Dollar Index (DXY), which measures the greenback’s strength against six major global currencies, is facing downward pressure, holding just above the 98 level after recently hitting a seven-week low of 98.13. Market participants are increasingly pricing in a series of interest rate reductions by the Federal Reserve (Fed) in 2026, exceeding the number of cuts forecasted by the Fed itself.
Investor Sentiment and Fed Outlook
Following the Fed’s latest policy meeting, where a 25-basis-point interest rate cut was announced, market expectations for future monetary easing have accelerated. According to the CME FedWatch tool, there is now roughly a 58% probability of the Fed reducing interest rates at least twice by October 2026. This contrasts with the Fed’s own projections, reflected in the so-called “dot plot,” which anticipates only a single interest rate cut next year, with the federal funds rate targeted at approximately 3.4% by year-end.
White House spokeswoman Karoline Leavitt indicated that President Donald Trump supports more aggressive rate cuts. She stated that while the President welcomed the recent quarter-point reduction, he believes additional easing is necessary to bolster economic growth.
Currency Performance This Week
The dollar’s weakness is evident across multiple currency pairs, with the Swiss franc emerging as the greenback’s strongest opponent this week. The USD slipped by 1.15% against the Swiss franc, making it the week’s weakest currency relative to the franc. Other notable performances include:
- USD down 0.76% against the euro (EUR)
- USD down 0.48% versus the British pound (GBP)
- Mixed movements against Asian currencies such as the Japanese yen (JPY), which saw a 0.28% gain for the dollar
These shifts reflect investors’ reassessment of the US monetary policy path and relative economic fundamentals worldwide.
Focus on Upcoming Economic Data
Market attention now turns to critical US economic reports due this week, especially the November Nonfarm Payrolls (NFP) data, scheduled for release on Tuesday. The NFP figure will provide insights into the labor market’s strength and influence future policy expectations. On the same day, investors will also review Retail Sales data for November and preliminary manufacturing and services Purchasing Managers’ Index (PMI) figures from S&P Global for December.
The employment data is closely watched as a barometer of labor demand, which is a key factor the Fed considers when deciding on interest rate adjustments.
Understanding the Fed’s Monetary Policy Tools
The Federal Reserve uses monetary policy primarily to achieve two mandates: price stability and maximum employment. Interest rates are the central tool; when inflation exceeds the target level of 2%, the Fed typically raises rates to cool economic activity and support the dollar’s strength. Conversely, when inflation is low or unemployment rises, lowering rates aims to stimulate borrowing and spending, generally weakening the dollar.
In addition to interest rate adjustments, the Fed employs other mechanisms such as Quantitative Easing (QE), which involves purchasing high-grade bonds to inject liquidity into the financial system—usually weakening the dollar. The opposite, Quantitative Tightening (QT), reduces bond holdings and typically supports a stronger dollar.
Outlook
The US Dollar Index remains vulnerable as diverging expectations between market participants and the Federal Reserve regarding the pace of rate cuts create uncertainty. Economic data releases in the coming days, especially employment numbers, will be pivotal in shaping the near-term direction of the US dollar and global financial markets.
Author: Sagar Dua, FXStreet
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