The US Dollar Index, which compares the USD to six other major currencies, has dropped to about 98.15. This decline is due to worries regarding the Federal Reserve’s independence and the likelihood of upcoming interest rate cuts. Attention is now on US employment data, which will provide new insights next week. Concerns about the Federal Reserve’s independence have increased, especially with President Trump’s administration. Trump may appoint a new Fed Chair to succeed Jerome Powell, whose term ends in May. This change could affect decisions on interest rates.

Federal Reserve Rate Cuts Outlook

Financial markets anticipate two interest rate cuts this year, even though the Fed’s outlook is more uncertain, with only a 15% chance of a cut in January. Important US reports, like Nonfarm Payrolls and the Unemployment Rate, could influence the Fed’s decisions and the value of the US Dollar. The US Dollar plays a crucial role in global foreign exchange, with vast daily trading. The Federal Reserve’s policies, especially regarding interest rates, significantly affect the dollar’s value. Tools like quantitative easing and tightening adjust the flow of credit in the economy, impacting the Dollar’s strength. These elements have historically defined the USD’s position worldwide. As we start 2026, the US Dollar Index is notably weak, sitting just above 98.00. This represents a significant decline from the highs of 2024, signaling a bearish trend. Traders may want to consider strategies that benefit from the dollar’s continued weakness against major currencies like the Euro or Yen. The expected change in Federal Reserve leadership later this year is a key factor, prompting speculation of a softer monetary policy. Although the Fed’s December 2025 forecasts were mixed, financial markets now expect at least two interest rate cuts in 2026. Current fed funds futures suggest there is over a 60% chance of a rate cut by the May meeting.

Impact of Inflation Data

This cautious outlook is backed by recent inflation data, which has shown a steady decline in the second half of 2025. The latest Consumer Price Index (CPI) for November 2025 recorded a rate of 2.3%, moving closer to the Fed’s 2% target following the high inflation years of 2022-2023. This gives the central bank the flexibility to ease policies to support a slowing economy. Next week’s Nonfarm Payrolls report for December 2025 is critical. A weaker jobs number could speed up the dollar’s decline, supporting the case for a rate cut and potentially driving the DXY down to around 97.00. Even if the jobs report is surprisingly strong, it may only lead to a temporary boost in the dollar, which could create a good opportunity to sell at a better price. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now