US Dollar Index (DXY) trims gains, dips below 98.30 in calm holiday trading

The US Dollar has been one of the weakest G8 performers in 2025

Investors’ concerns about the impact of US President Donald Trump’s erratic trade policies and growing signs of economic slowdown have boosted US Dollar short positions throughout the year. Beyond that, the unprecedented political pressures on the Federal Reserve to cut borrowing costs have eroded the market’s confidence in the bank’s independence, calling into question the US Dollar’s status as the world’s reserve currency.

With this in mind, the Federal Reserve remains halfway through its monetary easing cycle, at a moment when most of the world's central banks have reached their terminal rate. This has been a strong headwind for any significant Greenback recovery, and is likely to keep the US Dollar under pressure in 2026.

Trading volumes remain low in the last trading day of the year, but the US weekly Jobless Claims report might provide a last impulse to the FX market. Applications for unemployment benefits are expected to have grown to 220K in the week of December 16, from 214K in the previous week. The risk for the USD is skewed to the downside.

US Dollar FAQs

What is the US Dollar?

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from 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 went away.

How do the decisions of the Federal Reserve impact the US Dollar?

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

What is Quantitative Easing and how does it influence the US Dollar?

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

What is Quantitative Tightening and how does it influence the US Dollar?

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.