The US Dollar Index (DXY), which tracks the US Dollar (USD) against six major currencies, extended its recovery for a second consecutive session, trading near the 98.30–98.50 area during Asian hours on Wednesday as investors digested the latest Federal Reserve signals.
Minutes from the Federal Open Market Committee (FOMC) December meeting, released on Tuesday, pointed to a deeply divided policymaking body. Most participants agreed that it would likely be appropriate to pause further rate cuts if inflation continues to ease over time, while several officials argued that interest rates should remain unchanged for a period after three reductions delivered this year to support a weakening labor market.
FOMC minutes temper expectations for further easing
The minutes suggest a more cautious Fed stance going into 2026, with policymakers balancing cooling employment conditions against inflation that remains above target. This tone helped provide near-term support for the Greenback, even as markets remain positioned for additional easing further down the line.
According to the CME FedWatch tool, markets now assign an 85.1% probability that the Fed will hold rates steady at its January meeting, up from 83.4% the previous day. At the same time, expectations for a 25-basis-point rate cut have eased to 14.9%, down from 16.6%.
Dollar still pressured by long-term headwinds
Despite the recent rebound, the DXY remains on course for its steepest annual decline in years, down nearly 9.5% on the year. The prolonged weakness reflects a turbulent period for the US Dollar that began with uncertainty surrounding US trade policy and the rollout of tariffs under President Donald Trump.
Broader pressure on the Greenback persists amid expectations that the Federal Reserve could deliver two additional rate cuts in 2026, potentially narrowing interest-rate differentials between the US and other major economies. Concerns over rising fiscal deficits and questions surrounding the Fed’s independence have also weighed on sentiment.
Focus turns to Fed leadership and policy outlook
Markets are additionally watching developments around the Federal Reserve’s leadership, with President Trump expected to announce Jerome Powell’s successor early next year. Any shift in the perceived policy stance of the next Fed Chair could have significant implications for the Dollar’s medium-term trajectory.
At its December meeting, the Fed lowered interest rates by 25 basis points, bringing the target range to 3.50%–3.75%. In total, the central bank has cut rates by 75 basis points in 2025 as it responds to a cooling labor market while inflation pressures remain elevated.
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