The US Dollar Index (DXY) is steady around 98.00 in early European trading on Monday. This index tracks the USD against six major currencies and shows that traders are anticipating rate cuts by the US Federal Reserve in 2026. There’s also uncertainty about who will be the next Fed Chair. Recently, the Federal Reserve lowered the federal funds rate by 25 basis points, bringing it to a range of 3.50%-3.75%. Many traders expect more rate cuts in 2026 due to a slowing job market and decreasing inflation, which could impact the US Dollar. The CME FedWatch tool shows there is an 18.3% chance of interest rate cuts in January.

Impact Of Presidential Remarks

President Trump has suggested appointing a Fed chair who favors lower rates, which might affect how people view the Fed’s independence. Geopolitical issues, like US-Ukraine negotiations, might also change demand for safe-haven assets, possibly supporting the USD. Quantitative easing (QE) is a tool used by the Fed that increases the money supply to boost the economy. This usually weakens the dollar. On the other hand, quantitative tightening (QT) involves cutting back on bond purchases and reinvestments, which generally makes the dollar stronger. The market is closely watching these policies and any economic data that could impact the dollar. Currently, the US Dollar Index hovers around 98.00, but we believe this calm is just temporary given the slow holiday trading. Recent data shows the economy is cooling down, with November 2025’s Non-Farm Payrolls report indicating job growth slowed to 155,000, and the latest CPI inflation figure dropped to 2.7%. These trends support our expectation that the Federal Reserve will continue cutting rates into next year. Having slashed rates three times in 2025, it seems likely the dollar will weaken. We suggest preparing for this by considering strategies like buying puts on the DXY or on currency ETFs. The CME FedWatch tool shows an 18.3% chance of another cut in January, indicating the market has yet to fully account for the most aggressive dovish scenarios.

Potential Volatility From Fed Chair Appointment

The announcement of a new Federal Reserve Chair could lead to significant volatility. President Trump’s calls for lower interest rates indicate he plans to appoint a dovish candidate, which would likely further weaken the dollar. We see this as a major bearish factor for the first quarter of 2026. Despite this, we must remain cautious of geopolitical risks that may unexpectedly boost the dollar due to increased safe-haven demand. While there has been some progress in peace talks about the Ukraine conflict, unresolved territorial issues could easily disrupt these discussions. This ongoing uncertainty suggests we should hedge against overly negative dollar positions. Reflecting on the strong dollar environment from aggressive rate hikes in 2022 and 2023, we find ourselves in the opposite scenario now. Therefore, using options to create a bearish position can help us manage risks from short-term news while still benefiting from the broader downward trend. This strategy seems wise as we approach January. Create your live VT Markets account and start trading now.

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