The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, is extending its losses for the second successive session and trading around 98.20 during the Asian hours on Tuesday. The Greenback struggles as concerns about a broader geopolitical escalation ease. Markets are largely brushing aside tensions between the United States (US) and Venezuela.
The US launched a large-scale military strike against Venezuela on Saturday. US President Donald Trump said Venezuelan President Nicolas Maduro and his wife were captured and flown out of the country. On Monday, Maduro pleaded not guilty to US charges in a narco-terrorism case, setting the stage for an unprecedented legal battle with major geopolitical implications, according to Bloomberg.
The US ISM Manufacturing Purchasing Managers’ Index (PMI) declined for a third consecutive month, dropping to 47.9 in December 2025, the lowest since October 2024, from 48.2 in November and below the expected 48.3. The data indicate a faster contraction in US manufacturing activity, driven by declines in production and inventories. Meanwhile, the Employment Index edged up to 44.9 from 44.0 in November, while the Prices Paid Index, a gauge of inflation, remained unchanged at 58.5.
Minneapolis Fed President Neel Kashkari said inflation remains too high, though it is gradually easing. Speaking to CNBC on Monday, Kashkari noted the Fed is likely near a neutral rate, warned 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 Nonfarm Payrolls (NFP) report, for signals on the monetary policy outlook. The consensus forecast sees NFP rising by 55,000 jobs.
US Dollar FAQs
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.
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.
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.
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.
