The US Dollar is the official money of the United States and is used widely around the world. It plays a major role in global finance. In 2022, it represented over 88% of all foreign currency transactions, totaling $6.6 trillion daily. The Dollar was once backed by gold, but that changed in 1971 with the Bretton Woods Agreement. The value of the US Dollar is greatly influenced by monetary policy from the Federal Reserve (the Fed). The Fed aims to keep prices stable and maintain employment by adjusting interest rates. When inflation is high, interest rates usually increase, making the Dollar stronger. However, if inflation is low or if unemployment is high, the Fed may lower rates, which can weaken the Dollar. In times of financial crisis, the Fed uses quantitative easing (QE) to improve credit flow by buying government bonds, which can lead to a weaker Dollar. On the other hand, quantitative tightening (QT) involves stopping these purchases and generally strengthens the currency. Economic changes linked to key companies can also affect the markets and currencies, so any major announcements are watched closely. Right now, the US Dollar is the most important currency to pay attention to, as it is closely linked to the Fed’s actions. The latest inflation report from July 2025 showed that inflation rose to 3.8%, putting pressure on the Fed to respond. This ongoing inflation is significantly above the 2% target and affects market feelings. Based on this information, we think the Fed will adopt a strong stance to improve price stability. Current market predictions, as indicated by the CME FedWatch Tool, show a 70% chance of another interest rate hike at the September meeting. This possibility is causing the Dollar to strengthen against currencies like the Euro and the Yen. This situation closely resembles what we saw in 2022-2023, when aggressive rate increases led to a surge in the US Dollar Index (DXY). The DXY has now surpassed 107 for the first time this year, suggesting it may rise further based on historical trends. We are preparing for a stronger Dollar based on these patterns. For traders using derivatives, this means buying call options on the US Dollar or on ETFs that track the Dollar. This strategy allows one to benefit from a rising Dollar while managing and limiting risks. With market volatility, indicated by the VIX index near 18, options trading can help navigate expected price fluctuations. It’s also important to note that the Fed is continuing its quantitative tightening (QT) program and steadily lowering its balance sheet. This process reduces liquidity in the financial system, which usually supports a stronger Dollar. An announcement about slowing QT would be significant, but we do not expect that to happen soon. In the coming weeks, we will closely watch key employment reports and retail sales data. Strong economic results would likely lead to another rate hike and support the Dollar’s growth. Thus, traders should be ready for increased volatility around these data releases.

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