The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, fell after recording modest gains in the previous session. The DXY index is hovering around 99.10 during the Asian hours on Wednesday. Traders are preparing for US retail sales and producer price index data later in the North American session.
The dollar may rise further as the US Consumer Price Index (CPI) broadly met expectations, reinforcing views that the Federal Reserve (Fed) is likely to keep policy steady this month, even as underlying price pressures show signs of easing.
The US CPI rose 0.3% m/m in December 2025, which was in line with market expectations. Headline inflation remains at 2.7% year-on-year as expected. Meanwhile, the core CPI, excluding food and energy, rose 0.2% in December, below market expectations, while annual core inflation held steady at 2.6%, equivalent to a four-year low.
US CPI data provided a clearer signal of easing inflation after previous releases were skewed by lockdown effects. However, last Friday’s strong non-farm payrolls report, lower unemployment rate, and strong four-week average ADP employment change point to a resilient labor market.
The bullish impact of inflation data on the US dollar could be offset by concerns about the independence of the Fed. US federal prosecutors threatened to indict Federal Reserve Chairman Jerome Powell over his comments in Congress about a building renovation project, raising questions about the central bank’s independence. The Trump administration is pressuring the Fed to lower interest rates, with Powell calling the threat a “pretext” to influence policy.
Traders remain cautious amid rising geopolitical tensions. Reuters, citing the US-based human rights group Harrana, reported on Wednesday that the death toll in the Iranian protests had reached 2,571. US President Donald Trump urged Iranians to continue protesting, vowing that help was on the way.
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.
