The US dollar index rose 0.21% to close at 98.241 as traders adjusted positions across major currencies in the New York foreign exchange market. The euro slipped to $1.1747 from $1.1767, while the British pound fell to $1.3466 from $1.3507, reflecting broad dollar gains during the session.
At the same time, the dollar strengthened to 156.49 yen, rose to 0.7917 Swiss francs, climbed to 1.3696 Canadian dollars, and advanced to 9.1996 Swedish kronor. George Saravelos, global head of FX research at Deutsche Bank, said this year ranks among the worst for dollar performance since free-floating exchange rates began more than 50 years ago.
The losses in the previous period were mainly due to the aggressive tariffs imposed by the US government in April, which led to a depreciation of the dollar of up to 15% against major currencies, followed by a bit of recovery. The Federal Reserve's interest rate cuts have been a significant factor in the dollar’s depreciation, even though the currency has recently stabilized.
Traders expect two or three quarter-point Federal Reserve rate cuts by the end of 2026, according to a report by the Financial Times. In contrast, European Central Bank president Christine Lagarde said all options remain open after the ECB held rates and raised growth and inflation forecasts.
Consequently, if US rates decrease more quickly than those of Europe, the dollar will be under pressure. Uncertainty has escalated as a government shutdown at the end of 2025 curtailed access to important economic data, such as employment and inflation indicators, that were initially available.
According to a Forex.com report, employment and inflation still hint at the possibility of rate cuts. However, inflation might rise to the point that it undermines the aforementioned outlook. So, will the Federal Reserve be able to nurture the economy without allowing inflation to rise alongside if long-term rates do not respond to the policy cuts?
Mark Sobel, a former Treasury official and US chair of OMFIF, said concerns about long-term dollar dominance continue to influence market thinking. Despite those concerns, the dollar has rebounded about 2.5% from its September low after fears of a trade-war-driven recession failed to materialize.
Supporters of the dollar point to continued investment in artificial intelligence, which they say keeps US growth ahead of Europe and limits aggressive easing. Saravelos said part of the dollar’s weakness reflects a structural reassessment of unhedged dollar exposure by global investors, especially in Europe.
Investors increasingly use derivatives to hedge currency risk, and that hedging activity adds selling pressure on the dollar in spot markets. Meanwhile, bond investors continue to focus on long-term inflation expectations, which influence yields beyond short-term Federal Reserve policy moves.
Also Read: Index Trades Cautiously as BP Deal and Commodity Surge Dominate Festive Session
The US dollar index rose as currency markets adjusted to shifting Federal Reserve rate cuts and global policy divergence. Gains against major currencies followed renewed focus on investor hedging pressure and long-term inflation risks. Market direction now depends on future rate signals and incoming economic data.