US Dollar Index holds near yearly lows pressured by lower yields

FXStreetFeb 26, 2025 12:10 PM

The US Dollar slightly recovers on Wednesday, looking for direction against most major peers.
Traders are mulling rate cut bets by the Fed with Tump’s tariffs set to kick in at the start of March.
The US Dollar Index (DXY) holds near yearly lows and looks sluggish.

The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, edges slightly higher and trades around 106.50 at the time of writing on Wednesday after not breaking any pots or making any positive impressions in February. The DXY Index holds near yearly lows as traders shun the Greenback in a flight to safe havens from United States (US) President Donald Trump’s tariffs, which are set to kick in on March 4 for Mexico, Canada, and China.

Meanwhile, traders are seeing a second element of a weaker greenback. For the first time this year, Federal Reserve (Fed) rate cut bets are pricing in two rate cuts for 2025. The move comes as the interest rate gap between US yields and other countries narrowed, triggering a weaker US Dollar overall. It comes just days before the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) data, which will be released on Friday.

Daily digest market movers: Trump ahead

At 14:00 GMT, US President Donald Trump will be speaking with the media.
At 15:00 GMT, New Home Sales are expected to slow down to 0.68 million units for January compared to the 0.698 million units a month earlier.
At 17:00 GMT, President of the Federal Reserve Bank of Atlanta Raphael Bostic participates in a moderated discussion at the Urban Land Institute in Atlanta.
At 18:00 GMT, Federal Reserve Bank of Richmond President Thomas Barkin delivers a speech, "Inflation Then and Now", at the Northern Virginia Chamber of Commerce, Arlington.
Equities are brushing off the negative tone from Tuesday and are up across the board on Wednesday.
The CME FedWatch tool shows an uptick in chances for an interest rate cut by the Federal Reserve (Fed) in June, backed by the drop in US yields this Wednesday. Currently, the tool projects a 66.2% chance of interest rates being lower than current levels compared to 33.8% for no rate cut
The US 10-year yield trades around 4.30%, further down from last week’s high at 4.574%.

US Dollar Index Technical Analysis: Yields into the ground

Lower US Yields drive theUS Dollar Index (DXY) into the ground. The dive in US yields only picked up speed after US Treasury Secretary Scott Bessent said on Tuesday that US rates would come down anyway, even without the Fed. Expect to see the DXY dive lower to the long-awaited 106.00 barrier.

On the upside, the DXY index is trying to recover the 106.52 (April 16, 2024, high) level on Wednesday after breaking and closing below it the prior day. Further up, the 100-day Simple Moving Average (SMA) could limit bulls buying the Greenback near 106.71. From there, the next leg could go up to 107.35, a pivotal support from December 2024 and January 2025. In case US yields recover and head higher again, even 107.96 (55-day SMA) could be tested.

On the downside, if the DXY cannot recover the 106.52 level, another leg lower might be needed to entice those Dollar bulls to reenter near 105.89 or even 105.33.

US Dollar Index: Daily Chart

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.

Disclaimer: For information purposes only. Past performance is not indicative of future results.