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The US Dollar

The US dollar is the world's main reserve currency. Most global commodities, trade deals, and capital flows are priced in dollars. When the dollar rises or falls, it sends ripples through currencies, commodities, and stock markets worldwide. The Dollar Index (DXY) measures the dollar against a basket of major currencies and is the standard gauge of its strength.

Main drivers

What pushes the dollar up

• Expectations of higher interest rates — When markets believe the Federal Reserve will raise rates or keep them high, global investors move money into dollar assets to earn better returns, pushing the dollar up.
• Higher-than-expected inflation — Hot inflation data makes traders bet on tighter Fed policy, which attracts capital to the dollar.
• Strong job market data — Low unemployment and strong hiring signal economic strength and wage pressure, reinforcing expectations that the Fed will keep rates elevated.
• Rising oil prices — Higher oil prices feed into US inflation, which in turn supports expectations of higher rates and a stronger dollar.
• Strong business activity data — When factory output and services surveys beat expectations, traders price in a more resilient economy and firmer Fed policy.
• Political events favoring growth or higher rates — Election outcomes or Fed leadership picks that signal stronger growth, higher inflation, or tighter policy can trigger sharp dollar rallies.

What pushes the dollar down

• Expectations of rate cuts — When the Fed signals it will lower rates, or data supports that view, investors move capital elsewhere and the dollar weakens.
• Lower-than-expected inflation — Soft inflation data raises hopes that the Fed is done raising rates, reducing the dollar's appeal.
• Weak job market data — Rising unemployment and disappointing hiring numbers push traders to bet on rate cuts, weakening the dollar.
• Weak business activity data — Contracting factory output and falling consumer confidence signal economic slowdown, fueling rate-cut bets.
• Trade policy uncertainty and loss of confidence — Escalating trade wars and threats to Fed independence can shake investor trust in US assets, driving money out of the dollar.

Historical examples

When the dollar increased

• Expectations of higher interest rates

  • April 2023 — A tight labor market and strong jobs report pushed the 10-year government bond rate above 3.41%, lifting the dollar as traders bet on another Fed rate increase in May.
  • September 2023 — Markets priced in extended tight policy from the Fed, pushing the dollar to 10-month highs alongside bond rates not seen since 2007.

• Higher-than-expected inflation

  • September 2023 — US annual inflation rose for a second straight month to 3.7%, partly driven by higher oil prices. This reinforced bets on further rate increases and strengthened the dollar.

• Strong job market data

  • April 2023 — Private payroll growth beat expectations and wage growth accelerated unexpectedly, supporting expectations of a rate hike. The Fed raised rates by 0.25 percentage points that month.

• Rising oil prices

  • September 2023 — Oil topped $85 per barrel after Saudi Arabia extended a major production cut and US oil inventories dropped sharply. Higher energy costs pushed inflation up, which in turn boosted rate expectations and the dollar.

• Strong business activity data

  • April 2023 — A composite business activity survey jumped to 53.5, the fastest upturn since May 2022, with employment growth at its quickest since July 2022. This supported rate-increase bets and dollar strength.

• Political events

  • November 2024 — The dollar rallied sharply after a decisive Republican presidential victory, with markets betting on stronger US growth and higher inflation under the new administration.
  • January 2026 — The nomination of a Fed chair candidate seen as leaning toward raising rates triggered a sharp dollar rebound and a massive sell-off in gold.

When the dollar decreased

• Expectations of rate cuts

  • August 2024 — Fed Chair Powell gave the clearest signal of coming rate cuts since the end of the rate-raising cycle. The Dollar Index fell nearly 5% in a single month to a one-year low of 100.5.
  • March 2024 — Weak factory activity and falling consumer sentiment drove rate-cut expectations, sending the dollar and bond rates lower while gold hovered near all-time highs.

• Lower-than-expected inflation

  • June 2023 — US annual inflation slowed to 3%, the lowest since March 2021, with energy costs dropping 16.7%. Markets took this as a sign the Fed was near the end of its rate increases, and the dollar weakened.

• Weak job market data

  • July 2024 — The economy added only 114,000 jobs against expectations of 175,000, and unemployment unexpectedly rose to 4.3%. The dollar fell to a seven-month low. In one week, the odds of a large rate cut in September jumped from 12% to 92%.
  • July 2023 — Job openings fell to their lowest level since March 2021, reinforcing bets that the Fed would stop raising rates. The Dollar Index held below 104.

• Weak business activity data

  • March 2024 — Factory activity contracted more than expected and consumer sentiment was revised sharply downward, supporting rate-cut expectations and a weaker dollar.
  • October 2024 — Manufacturing contracted for the sixth straight month with weak demand, easing the dollar and bond rates.

• Trade policy uncertainty and loss of confidence

  • April 2025 — The dollar fell to a three-year low as investor confidence eroded over plans to overhaul the Federal Reserve and an escalating trade war that included a 104% tariff on Chinese imports. Investors began questioning the dollar's role in the global financial system.

Who benefits

When the dollar rises

• US bond holders — Higher rates that drive dollar strength also mean better returns on US government bonds.
• US consumers buying imports — A stronger dollar makes foreign goods cheaper.
• Countries importing oil — Dollar strength often coincides with lower commodity prices, reducing import bills for energy-dependent economies.

When the dollar falls

• Gold investors — Gold is priced in dollars, so a weaker dollar makes gold cheaper for foreign buyers and boosts demand. In April 2025, gold surged above $3,400 per ounce alongside a dollar at three-year lows.
• Oil and commodity producers — A weaker dollar makes commodities cheaper for global buyers, lifting demand and prices. In December 2023, oil rose toward $77 per barrel after the Fed signaled rate cuts and the dollar softened.
• The euro area — Dollar weakness pushes the euro higher. In April 2025, the euro gained roughly 5% against the dollar in a single month, reaching levels not seen since early 2022. A stronger euro helped ease European inflation, giving the European Central Bank room to cut rates.
• US exporters and stock markets — A weaker dollar makes US goods more competitive abroad and boosts the foreign earnings of large companies. In November 2023, a declining dollar helped lift major US stock indexes.
• Emerging market commodity exporters (when the dollar is stable or weak) — Countries like Brazil benefit from higher commodity prices and stronger capital inflows. When the dollar surged in late 2024, the opposite happened: the Brazilian real fell to a record low as commodity prices dropped and capital fled to dollar assets.
• Japan (mixed) — A weaker dollar relieves pressure on the yen, reducing import costs. When the dollar surged after the November 2024 election, the yen fell to a three-month low, pushing up Japanese inflation and forcing policymakers to consider rate increases.
• Industrial metal and silver markets — These are priced in dollars, so a weaker dollar supports prices. When the dollar rebounded in early 2026 on a new Fed chair nomination, silver plunged nearly 10%.