Dollar Index Hovers Near 7-Week Low After Federal Reserve Rate Cut

Synopsis: The dollar index fell to a seven-week low following the Federal Reserve’s third consecutive rate cut. Policymakers projected just one cut in 2025, signaling a cautious approach. Let’s dive into how this decision affected other currencies.

The dollar index fell to its lowest level in nearly seven weeks after the Federal Reserve cut interest rates in December. This marked the Fed’s third consecutive reduction since September, signalling a continued shift toward looser monetary policy.

The US dollar weakened against major currencies, including the euro and the yen. The dollar index, which tracks the U.S. currency against a basket of peers, traded at 98.62, down 0.17% and hovering at its weakest point in almost seven weeks.

The Federal Reserve lowered the federal funds rate by 25 basis points, bringing the target range to 3.5%–3.75%. The move was widely expected across markets, but investors focused on the Fed’s cautious guidance for 2025. Policymakers projected just one rate cut next year, unchanged from their forecast in September. Their stance suggested a slower and more data-dependent easing cycle ahead.

Fed Rate Decision

The dollar index slid nearly 1% in the previous session immediately after the Fed announcement. The sharp decline reflected traders’ response to the central bank’s emphasis on monitoring economic data before further adjusting its policy.

Fed officials reiterated that they will shift policy as necessary if risks emerge that could undermine economic goals. This flexible stance underscores ongoing uncertainty around inflation and growth.

Markets now turn to weekly U.S. jobless claims for additional clarity on labor market momentum, a crucial component of the Fed’s decision-making process. The dollar dropped 1.35% against the Swiss franc to 0.797 and slipped 0.92% against the Japanese yen to 155.48, mirroring broader moves across global currency markets.

Fed Officials Split on Rate Path

The December decision drew three dissents, an unusual level of division within the Federal Open Market Committee. Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid favored keeping rates unchanged, while Fed Governor Stephen Miran argued for a larger 50-basis-point cut.

Such disagreement is rare. The FOMC has not seen three or more dissents in a single meeting since 2019, and this level of division has occurred only nine times since 1990. Mixed economic signals continue to complicate policymaking. The labor market shows signs of cooling, overall growth remains steady, and inflation still sits above the Fed’s 2% target.

Economic Outlook

The dollar index has moved lower over the past three weeks, but bullish momentum is starting to reappear. Weekly positioning data shows speculators holding their largest long dollar position since before April, a sign of renewed confidence.

Traders are also watching fiscal developments. President Trump’s proposed economic stimulus bill, dubbed the “One Big Beautiful Bill,” could strengthen the dollar if the measures boost economic activity and capital inflows. The Fed, on the other hand, continues to balance inflation pressures with employment trends, maintaining a data-dependent approach to future policy adjustments.

Global Currency

The EUR USD edged slightly lower to $1.17 as European bond yields climbed. Germany’s 30-year yield touched its highest point since 2011. ECB policymaker Isabel Schnabel signalled that further rate cuts are unlikely and even left the door open to a potential hike.

The Australian dollar briefly hit $0.6686, its highest since mid-September, before easing to $0.6621 ahead of the Reserve Bank of Australia’s policy meeting. Strong inflation data has heightened expectations around RBA decisions.

The Canadian dollar weakened as the greenback climbed 0.63% to C$1.378, while the British pound traded steady near $1.339. Across global markets, the dollar index continues to mirror diverging monetary policies, with traders closely watching central bank signals for the next big move.

Written By Fazal Ul Vahab C H

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