The US Dollar Index is holding steady above 97.00 as we await the release of the ISM Manufacturing PMI data. This Index measures the US Dollar’s value against six major currencies and has stabilized after a rise of over 1% in the previous session, trading around 97.20 during Tuesday’s Asian hours. The Dollar is gaining support as concerns grow about the Federal Reserve’s policy direction, especially after Trump’s nomination of Kevin Warsh as Fed Chair. Warsh is seen as leaning towards lowering rates, though not as aggressively as some other candidates.

Expected Changes by Fed

Warsh is expected to trim the Fed’s balance sheet, which could impact market liquidity. Two rate cuts are still likely this year under his leadership, but the FOMC remains unsure about the pace of these reductions. Sentiment in the markets is improving as the US Senate moves forward with a government funding package, reducing the risk of a shutdown. US producer price index (PPI) inflation held steady at 3.0% year-over-year in December, beating forecasts and reinforcing the Fed’s current policy. The US Dollar is the official currency of the USA and is a leading global currency. It significantly influences currency markets and was backed by gold until 1971. The Federal Reserve’s policies directly impact the dollar’s value, affecting interest rates and involving measures like quantitative easing or tightening. Currently, the US Dollar Index is trading around 104.50, a notable change from the 97.00 level common in 2025. This strength exists despite ongoing debates about the Federal Reserve’s next steps. Traders should consider this higher baseline as it impacts calculations for currency-related derivatives.

Recent Economic Indicators

Looking back at last year’s market, there was speculation about appointing a new Fed Chair and expectations of two rate cuts. In early 2026, the Federal Reserve has made several adjustments, leading to increased uncertainty about future moves, with a focus on economic data. This shift from a clear easing stance has altered the risk profile for the dollar. Last year’s producer inflation data showed core PPI stubbornly at 3.3%, but this has since eased. The latest Consumer Price Index (CPI) report for January 2026 indicates core inflation has moderated to 2.4%, approaching the Fed’s target. While this is a positive development, it raises questions about whether the Fed will keep its current approach or signal changes ahead. With the transition from a clear easing path to a data-driven strategy, interest rate market volatility has increased, as shown by the MOVE index hovering around 120. Derivative traders should develop strategies to manage potential fluctuations in the dollar and Treasuries. Being prepared for sudden policy announcements is now more important than it was in 2025. Attention is shifting from last year’s funding agreements to the new Congress’s upcoming fiscal debates. Discussions about the budget and debt ceiling could bring new risks that did not exist in 2025. These political issues are likely to affect market sentiment, causing sharp movements in the dollar, regardless of Fed policy. Create your live VT Markets account and start trading now.

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