The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, continues its losses for the second straight session and is trading around 98.20 during the Asian hours on Tuesday. The US dollar faces difficulties as concerns about broader geopolitical escalation ease. Markets have largely ignored tensions between the US and Venezuela.
The United States launched a large-scale military strike against Venezuela on Saturday. US President Donald Trump said that Venezuelan President Nicolas Maduro and his wife were arrested and flown out of the country. Maduro on Monday pleaded not guilty to charges brought against him by the United States in a terrorism and drug case, paving the way for an unprecedented legal battle with major geopolitical implications, according to Bloomberg.
The US ISM Manufacturing PMI fell for the third straight month, falling to 47.9 in December 2025, the lowest level since October 2024, from 48.2 in November and a lower than expected 48.3. The data indicates a faster contraction in manufacturing activity in the United States, driven by lower production and inventories. Meanwhile, the employment index rose to 44.9 from 44.0 in November, while the prices paid index, a measure of inflation, remained unchanged at 58.5.
Minneapolis Fed President Neel Kashkari said inflation remains very high, although it is gradually declining. Speaking to CNBC on Monday, Kashkari noted that the Fed is likely to approach a neutral rate, warned that the unemployment rate could rise from here, and said he expects the economy to remain resilient.
Traders are awaiting a series of key US economic releases this week, including the Non-Farm Payrolls (NFP) report, for signals on the outlook for monetary policy. The consensus forecast is for nonfarm payrolls to rise by 55,000.
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.
