The US Dollar Index (DXY) is currently around 98.20, showing a decline as tensions between the US and Venezuela lessen. This index reflects the US Dollar’s value compared to six major currencies and has dropped over the last two trading sessions. A recent US military strike in Venezuela resulted in the capture of President Nicolas Maduro. Maduro has denied charges of narco-terrorism from the US, which could lead to serious legal outcomes.

US ISM Manufacturing PMI Decline

In December 2025, the ISM Manufacturing PMI in the US fell to 47.9, the lowest since October 2024. This indicates ongoing shrinkage in US manufacturing, with decreases in both production and inventory. Minneapolis Fed President Neel Kashkari pointed out that inflation remains elevated and unemployment could rise. Traders are closely examining upcoming economic data, especially the Nonfarm Payrolls report expected to show a 55,000 job increase. The US Dollar is the world’s most traded currency, making up over 88% of foreign exchange transactions in 2022. Its value is influenced by decisions from the Federal Reserve and various economic indicators. When the Fed engages in quantitative easing, the US Dollar weakens. In contrast, quantitative tightening has the opposite effect, strengthening the Dollar. The Fed employs these strategies to ensure economic stability and manage employment levels.

US Dollar Index Trends

As the US Dollar Index weakens around the 98.20 mark, the immediate concerns from the US-Venezuela conflict have subsided. The market has fully adjusted to last weekend’s events, shifting our focus back to the fundamental US economic data. The outlook for the dollar seems increasingly weak. Manufacturing activity has contracted for three consecutive months, with the December 2025 ISM PMI dropping to 47.9. Additionally, the Nonfarm Payrolls report released on January 2nd revealed only 30,000 new jobs added—far below the expected 55,000—confirming a slowing labor market. This disappointing data supports Kashkari’s recent statements that the policy rate is close to neutral and unemployment may rise. As a result, futures markets are now anticipating no further rate hikes in 2026, with the CME FedWatch Tool suggesting almost a 40% chance of a rate cut by the third quarter. This marks a notable change from just a month ago when there was an expectation for rates to remain steady. For those trading derivatives, this environment hints at rising implied volatility in currency markets. The combination of slowing growth and persistent inflation—Core PCE was last reported at 3.8% for November 2025—creates uncertainty regarding the Fed’s future actions. Strategies like straddles or strangles on major pairs like EUR/USD could be beneficial as they may profit from larger price movements in the weeks ahead. Currently, the most likely direction for the dollar appears to be downside. We might consider buying call options on currencies such as the Euro and Australian Dollar, or purchasing puts on the US Dollar Index. The weak Nonfarm Payrolls data gives us more confidence to expect a decline in the Greenback, aiming for a break below the 98.00 support level on the DXY. The next important event will be the Consumer Price Index (CPI) report for December 2025, which is set to be released next week. If inflation comes in lower than expected, it would strengthen expectations for Fed rate cuts and potentially accelerate the Dollar’s decline. On the other hand, a surprisingly high figure could heighten fears of stagflation and might lead to a sharp, volatile market reaction as investors reconsider the Fed’s challenging situation. Create your live VT Markets account and start trading now.

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