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US Dollar Fundamentals (USD)

By Rutger Lokin · Updated

US dollar fundamentals turn, most of the time, on one question: what will the Federal Reserve do with interest rates over the next year or so? In a crisis the question changes to who in the world needs dollars, and how badly.

The dollar is in almost every trade

In April 2025 the dollar was on one side of 89.2 percent of all currency trades (BIS Triennial Survey). Every trade has two currencies, so the shares add up to 200 percent, and the dollar takes almost half of that on its own. Central banks hold it too: 56.7 percent of the world’s foreign exchange reserves were in dollars in the second quarter of 2026 (IMF COFER).

That has a practical side for you. If you buy EUR/USD, sell USD/JPY and buy AUD/USD, you have not spread your risk over three ideas. You hold one large bet on a weaker dollar, and one Fed meeting can move all three against you at once.

The Fed has two jobs

Congress gave the Federal Reserve two goals, maximum employment and stable prices, which is why people call it the “dual mandate” (Fed FAQ). The ECB and the Swiss National Bank have price stability as their main job. The Fed has to weigh jobs next to it, and that is why a US jobs report can move the dollar as much as an inflation report.

For inflation the Fed aims for 2 percent over the longer run, measured by the PCE price index rather than the better-known CPI (Fed FAQ). CPI gets more attention on the day it comes out. When Fed officials talk about their target, though, PCE is the number they mean.

The market trades the next move

The FOMC, the Fed’s rate-setting committee, meets eight times a year. Four of those meetings, in March, June, September and December, come with a Summary of Economic Projections: each official’s forecast, including where they expect rates to be (FOMC calendar). That chart of dots is explained in The Fed Dot Plot Explained.

The dollar can rally on a day the Fed leaves rates where they are, because the dots moved higher or the chair sounded less keen to cut. Today’s rate is already in the price. What moves it is the expected path.

That is also why “the dollar falls when the Fed cuts” is a weaker rule than it sounds. The Fed began seven easing cycles from 1989 to 2024. A year after the first cut, its index of the dollar against the other advanced economies’ currencies was lower in five of them, by 1 to 5 percent. It was higher in two: by 8.6 percent after the cut of July 1995 and 4.8 percent after January 2001, a year in which the Fed cut eleven times.

Recessions tell the same story. In three of the four US recessions since 1989, in 2001, 2008–09 and 2020, the same index rose, by 1.6 to 5.5 percent. Only in 1990–91 did it fall. That fits the scramble for dollars described below. These figures compare monthly averages of the Fed’s own index (Federal Reserve H.10) from the month before the first cut, or before the recession began on the NBER’s dates. Seven cycles and four recessions are few, and they describe the past, not the next cycle.

Each decision is on Fed Interest Rate Decision (FOMC), and the date of the next one on When is the next FOMC meeting? Against any other currency, what counts is the gap between the two central banks’ paths. That gap is on Interest rate differential by currency pair, after inflation on Real interest rates by currency, and for the most traded pair on EUR/USD fundamentals.

The US data that moves it

Because of the dual mandate, jobs and inflation come first.

In every case the dollar reacts to the result against the forecast. Say CPI comes in at 3.0 percent (an invented figure). That supports the dollar if 2.8 was expected and weighs on it if 3.2 was.

The safe haven held in March 2020

Banks and companies all over the world borrow in dollars. When a panic hits, they all need dollars at the same moment, to repay and to cover losses, and that scramble lifts the dollar even when the trouble did not start in the US.

March 2020 is the clearest recent case: EUR/USD fell from 1.1456 on 9 March to 1.0707 on 20 March at the ECB’s reference rates (ECB), and on 15 March the Fed and five other central banks made dollars cheaper to borrow abroad through swap lines (Fed press release). How the dollar, the yen and the franc split that month is in What Is a Safe Haven Currency?

It failed in April 2025

On 2 April 2025 the US announced a 10 percent tariff on imports from all countries, and higher rates on the countries it ran the largest trade deficits with (White House fact sheet). This time the shock came from US policy itself, and the dollar fell instead of rising. EUR/USD went from 1.0803 on 2 April to 1.1476 on 22 April (ECB).

So before you buy dollars because markets are falling, ask where the stress comes from. When it started abroad, the dollar has usually been where money ran. When it started in US policy and hit US assets, the dollar was one of the things people sold.

Positioning through the Dollar Index

For the dollar the CFTC counts the ICE US Dollar Index future, and the US dollar (Dollar Index) COT report prints the leveraged funds’ line in it. A view on the dollar is often held through euro or yen futures instead, so read it beside the Euro COT report and the Japanese yen COT report before you call the dollar crowded. The other side of each pair has its own guide, such as Euro Fundamentals (EUR) or British Pound Fundamentals (GBP).