By Vivien Lou Chen
The dollar is back to being the ‘cleanest shirt in the laundry’ when compared to major peers, says Trade Nation market analyst David Morrison
The ICE U.S. Dollar Index has been rising since the Federal Reserve’s September interest-rate cut, as the central bank has taken a cautious stance toward further reductions.
The U.S. dollar is finally catching a break.
After a rough start to 2025 that saw the dollar tally its worst first-half performance in a calendar year since at least the early 1970s, the greenback has been rising steadily since the Federal Reserve started cutting interest rates again in September.
On Tuesday, the ICE U.S. Dollar Index DXY, a closely watched gauge of the dollar’s strength against its main rivals, reached its highest intraday level since early August, at 100.22, Dow Jones Market Data showed. If the index finishes Tuesday’s session at or around its current levels, it would mark the currency’s highest end-of-day level since May.
Many on Wall Street, including strategists at Deutsche Bank, had expected the dollar to continue to slide as the Fed started to cut interest rates. Instead, the buck has strengthened as key Fed officials – including Chairman Jerome Powell – have signaled that the central bank might be taking a more cautious approach to further rate cuts. That has given the buck a boost.
The dollar was riding high heading into 2025, with the dollar index hitting a multiyear high early in the year, FactSet data showed. Then came Trump’s “liberation day” tariff onslaught, which rattled global markets in April. While Trump walked back most of those initial tariffs, easing pressure on stocks and the bond market, the dollar remained stuck in a rut.
Strategists have cited several reasons for why the dollar has been more slow to recover. Some have said President Donald Trump’s tariffs have tarnished the U.S. brand. Then there was the possibility he might talk down the U.S. currency to correct a trade imbalance, as well as the willingness of investors to use gold (GC00) and bitcoin (BTCUSD) as hedges against a depreciating dollar. Now, the greenback appears to be regaining some of its appeal, even after the Fed lowered interest rates again in October.
The dollar “had a disastrous start to 2025” that lasted through mid-September and, at that stage, “there was probably no one left to go short,” said David Morrison, a London-based senior market analyst at financial-services provider Trade Nation. The U.S. currency became “oversold,” but now it once again looks like “the cleanest shirt in the laundry,” he said.
Before its turnaround, the buck had touched its weakest level since early 2022.
Typically, the dollar tends to weaken when U.S. interest rates fall, but that didn’t happen this time. Traders had already priced in the Fed’s September rate cut, which Powell characterized as a “risk management” move – dashing hopes for an aggressive easing cycle. The index kept inching higher last month and in early November, even after the Fed cut rates again by another quarter-point on Oct. 29.
On Tuesday, investors were in the throes of a global stock-market selloff triggered by concerns about valuations from corporate chief executives like Goldman Sachs’s David Solomon. U.S. government debt rallied modestly, sending yields slightly lower, and the ICE dollar index rose 0.3% to around 100.22 in recent trading.
While some have expressed dissatisfaction with the dollar’s role as the global reserve currency, the fact remains that there is no obvious alternative to replace it, said Standard Chartered’s Steve Englander.
When it comes to currencies, much depends on what else is happening in the rest of the world. Weakness from some of the dollar’s main rivals has contributed to the buck’s latest burst of momentum.
“Europe is not in a good place,” Morrison of Trade Nation said during a phone interview. “The eurozone (EURUSD), as a whole, has relied far too much on Germany, which has an unfavorable regulatory environment. France is struggling and Italy is the only bright spot,” he added, although not by very much.
Meanwhile, Japan’s new prime minister, Sanae Takaichi, supports further fiscal stimulus, which is helping to weaken the yen (USDJPY).
The Fed also remains a key factor driving the dollar’s direction. In the U.S., Powell pushed back last Wednesday against expectations for another rate cut in December, saying such a move is not a “foregone conclusion.” Since then, the market-implied chances of a December rate cut have slipped to 70.1% from 90.5% a week ago, according to data from CME Group.
The greenback appears to be benefiting from “the shift toward a more hawkish Federal Reserve, along with poor developments in Europe and Japan,” said Marc Chandler, chief market strategist and managing director at Bannockburn Capital Markets. “I still see some more room for corrective gains to the dollar. What’s more remarkable is that it is occurring during a government shutdown.”
Chandler said he thinks the dollar index can get to 101.50 by the end of the month, and possibly even 105 by the end of the year, although he doesn’t expect it to return to the higher levels seen in January or February.
Trade Nation’s Morrison disagreed. He said the ICE dollar index “is in a very interesting place at the moment.” According to Morrison, the buck could easily make another low this year. However, if it manages to hold above 100 for several weeks, that could signal that the greenback has turned a corner.
If that happens, Morrison doesn’t see why the buck can’t make a comeback all the way to its levels from January some time next year.
Joseph Adinolfi contributed.
-Vivien Lou Chen
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11-04-25 1431ET
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