The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, continues its gains for the second straight session and is trading around 98.60 during the Asian hours on Monday. Traders are likely to monitor the ISM Manufacturing PMI data scheduled for release later today.
The US dollar strengthened due to safe haven demand, which can be attributed to renewed geopolitical tensions following the US arrest of Venezuelan President Nicolas Maduro.
CNN reported over the weekend that US President Donald Trump’s administration launched a “large-scale strike against Venezuela” and detained President Maduro to face charges, without congressional approval. Trump said the United States will manage Venezuela until a safe, orderly, and wise transition is achieved.
The Guardian reported on Monday that President Trump warned that Washington could launch a new military intervention if Venezuela’s interim president, Delcy Rodriguez, fails to meet American demands. He also made statements about Colombian leadership, floated the idea of ”Operation Colombia,” criticized Mexico for not organizing its efforts, and suggested that Cuba appeared close to collapse.
Traders expect two additional interest rate cuts by the Fed in 2026. The Fed cut interest rates by 25 basis points in December 2025, lowering the target range to 3.50%-3.75%. It achieved cumulative cuts of 75 basis points in 2025 amid a cool labor market and still high inflation.
Minutes from the December Federal Open Market Committee (FOMC) meeting indicated that most participants viewed it as likely appropriate to stand for further interest rate cuts if inflation declines over time. Markets are preparing for US President Donald Trump to nominate a new Federal Reserve Chairman to replace Jerome Powell when his term ends in May, a move that could push monetary policy towards lower interest rates.
Frequently asked questions about the US dollar
The US dollar (USD) is the official currency of the United States of America, and the “de facto” currency of a large number of other countries where it is traded alongside local banknotes. It is the world’s most traded currency, accounting for more than 88% of total global forex trading volume, or an average of $6.6 trillion in transactions per day, according to 2022 data. After World War II, the US dollar took the place of the British pound as the world’s reserve currency. For most of its history, the US dollar was backed by gold, until the Bretton Woods Agreement in 1971 when the gold standard disappeared.
The most important factor affecting the value of the US dollar is monetary policy, which is shaped by the Federal Reserve. The Fed has two missions: achieving price stability (controlling inflation) and promoting full employment. The basic tool for achieving these two goals is adjusting interest rates. When prices rise too quickly and inflation is above the Fed’s 2% target, the Fed will raise interest rates, which helps the value of the US dollar. When the inflation rate falls below 2% or when the unemployment rate is very high, the Fed may cut interest rates, which affects the dollar.
In extreme cases, the Fed could also print more dollars and activate quantitative easing (QE). Quantitative easing is the process by which the Federal Reserve dramatically increases the flow of credit into a stuck financial system. It is a non-standard policy measure used when credit dries up because banks will not lend to each other (due to fear of the counterparty defaulting). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It has been the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis of 2008. This involves the Fed printing more dollars and using them to buy U.S. government bonds mostly from financial institutions. Quantitative easing usually leads to a weakening of the US dollar.
Quantitative tightening (QT) is the reverse process whereby the Fed stops purchasing bonds from financial institutions and does not reinvest capital from bonds it holds outstanding in new purchases. It is usually positive for the US dollar.
