DXY Index: Here’s why the US dollar is in a freefall

The US Dollar Index (DXY) continued its strong downward trend, reaching its lowest level in over four years as the greenback crashed against most currencies, such as the Australian dollar and the euro. 

The DXY Index tumbled to a low of 95.55 ahead of the upcoming Federal Reserve interest rate decision, which will come out later on Wednesday.

Federal Reserve to hold interest rates steady 

The US Dollar Index continued its strong downward trend as traders waited for the upcoming Federal Reserve interest rate decision.

Economists polled by Reuters and Bloomberg and polls on Polymarket and Kalshi shows that the bank will leave interest rates between 3.5% and 3.75% in this meeting. It will be the first monetary policy meeting after the Trump administration filed grand jury subpoenas against the bank and Jerome Powell.

The most recent economic numbers support the case for not cutting interest rates. For example, a report released last week showed that the US GDP grew by 4.4% in the third quarter. Analysts expect the upcoming fourth-quarter report to show that the economy expanded by 5%.

US inflation has not surged because of Donald Trump’s tariffs as economists were expecting. It remained around the 2.6% level last month, and analysts believe that the downtrend will continue because of the ongoing gas prices and mortgage rates.

The labor market has started to stabilize as well, with the unemployment rate falling to 4.4% in January as the economy created over 50k jobs.

Therefore, Fed policymakers argue that the current rates leave them well-positioned to balance risks to employment and inflation. In a note, a Bloomberg analyst said:

“The FOMC is widely expected to hold rates steady at the January meeting, but the gathering could still go down as a consequential one. A decision to pause rate cuts will provoke another firestorm from a White House.”

Donald Trump supports a weaker US dollar

The DXY Index plunged after a report released by the Conference Board said that the country’s conference board dropped to the lowest level in a decade.

Meanwhile, Donald Trump said that he supports a weaker US dollar. Trump prefers a weaker dollar, which he expects will boost US exports.

Trump has taken several measures to weaken the US dollar. He has embraced an erratic policy-making approach, implemented sweeping tariffs on countries like Iran and Russia, implemented sweeping tariffs across other countries, and put more pressure on the Federal Reserve. 

Additionally, he has implemented deficit spending, and his leadership is putting the US at risk of another government shutdown on Monday next week.

US Dollar Index technical analysis 

The three-day timeframe chart shows that the DXY Index continued its strong downward trend on Wednesday, reaching its lowest level since February 2022.

It has moved below the key support level at $96.25, its lowest level in June and September last year. The index has moved below the bottom of the trading range of the Murrey Math Lines tool.

It has moved below the 50-day and 100-day Exponential Moving Averages (EMA), while the Relative Strength Index (RSI) has moved to the oversold level.

Therefore, the index will likely continue falling as sellers target the key support level at $93.75, the Strong, Pivot, and reverse of the Murrey Math Lines tool.

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