For quite some months, the U.S. dollar has appeared somewhat fatigued. The U.S. Dollar Index has languished beneath the psychological 100 mark since November, shedding nearly 6.5% since that momentous “Liberation Day.” What was once an unparalleled sovereign among currencies found itself suddenly safeguarding its territory rather than expanding its reach.
why the dollar was struggling
The dollar’s frailty wasn’t without cause; it stemmed from a multitude of concerns. Firstly, markets were adamant that the Federal Reserve would engage in substantial interest rate cuts. Typically, such reductions weaken a currency, since lower yields lessen its allure. Expectations of an economic slowdown only exacerbated these apprehensions.
Additionally, there loomed anxieties regarding the Fed’s independence. Markets are perpetually uneasy about monetary policy swayed by political influences; such hints of pressure can diminish confidence in a currency.
There was also the unpredictable nature of Donald Trump’s trade and fiscal policies. Headlines about tariffs, budget arguments, and erratic policy signals made investors quite apprehensive. While the dollar didn’t exactly collapse, it steadily lost its stature.
what has changed?
- the data tells a different story
Interestingly, the narrative has shifted. The anticipation of rate cuts was anchored in fears of economic weakness. But the U.S. economy is behaving robustly.
- Growth projections for 2026 have been revised upwards. The International Monetary Fund now envisages U.S. real GDP growing at about 2.4%, whereas the Fed forecasts roughly 2.3% growth.
- Labour markets remain solid. Recently, the U.S. added 130,000 jobs, and unemployment eased to 4.3%. The four-week average of ADP employment change improved from 7.8K to 10.3K.
- Business activity also looks positive. The S&P Global US Composite PMI rose to 53.0 in January 2026, above the preliminary estimate and December’s level. Manufacturing and services are evidently expanding.
It’s akin to expecting a week of rain and waking up to clear skies. People are slowly putting their umbrellas away.
- the fed independence question: a calmer tone
Another looming concern was whether the Fed would maintain its independence. The nomination of Kevin Warsh to helm the Federal Reserve has alleviated those fears. He is perceived as disciplined, unlikely to introduce easy money, or erode the Fed’s credibility.
In truth, his emphasis on balance sheet reduction and ongoing quantitative tightening suggests tighter liquidity ahead. Fewer dollars in circulation, firmer financial conditions, and a supportive environment for the currency all point to a positive outlook.
Because, ultimately, dollar strength is about more than growth or interest rates; it involves trust and policy discipline.
- tariff fears vs. economic reality
Initially, tariffs were feared to be inflationary and harmful to growth, with worries that increased import costs might damage jobs and economic momentum. Yet, these risks haven’t largely come to pass. Inflation remains controlled, growth endures, and the job market hasn’t appreciably faltered.
Additionally, tariff revenues have surged, with the federal government amassing $195 billion in customs duties in FY 2025, over 250% higher than FY 2024. This reflects the influence of President Trump’s tariff policies. Inflation remains in check, and fiscal revenues are on the rise. Consequently, tariffs are increasingly perceived as dollar-supportive rather than destabilising.
one factor never truly disappears: geopolitics
Recently, tensions between the U.S. and Iran served as reminders of why the dollar remains the world’s sanctuary currency. In times of uncertainty, capital seeks depth, liquidity, and safety.
No market provides such a combination better than U.S. Treasuries. Moreover, reports suggest Russia is considering a return to the U.S. dollar settlement system amid broader economic discussions with Washington. If realised, this would subtly bolster the dollar’s dominance in global trade, notably in energy markets.
In stressful times, investors gravitate towards the dollar, not away from it.
dxy outlook: with weak uk and even weaker euro
The backdrop for the dollar is improving quietly, both domestically and abroad. The euro and the pound compose nearly 70% of the U.S. Dollar Index, yet both economies face structural growth issues and faded momentum. With underperformance in Europe and the UK, the balance naturally tilts in the dollar’s favour.
The dollar’s recent weakness was driven by fears of a slowdown, swift rate cuts, policy uncertainty, and doubts over Fed independence.
However, today those fears appear less dire. U.S. growth remains sturdy, labour markets are resilient, and expectations for aggressive rate cuts are delayed. Trade tensions have stabilised, while geopolitics continues to drive safe-haven demand.
Against this backdrop, technically and fundamentally, the U.S. Dollar Index seems poised for a rebound towards the 100.00 to 100.50 zone soon, potentially extending towards 102 if momentum continues.
The dollar may not return to unrestrained strength, yet the narrative of a persistent decline is fading. Sometimes, a currency doesn’t need perfect conditions to gain; it merely needs uncertainty to diminish. And that shift may already be underway.
outlook for rupee
If the dollar is gearing for a resurgence, the rupee cannot escape unscathed. The correlation is straightforward yet impactful: globally stronger dollars often pressure emerging market currencies, including the Indian rupee.
However, the rupee’s narrative isn’t only about the dollar. Domestic factors add complexity.
- India’s defence commitments are rising significantly. Approvals of purchases, like Dassault Aviation’s Rafale jets, and a historic Rs 7.85 lakh crore ($93.5 billion) allocation to the Ministry of Defence in the Union Budget 2026–27 signal future dollar outflows. Defence imports lead to constant dollar demand, steady, recurring, and hard to compress.
- Concurrently, India’s merchandise trade deficit widened remarkably to $34.68 billion in January 2026, far above projections. A wider deficit means more dollars exit to pay for imports. If crude prices rise, this could heighten pressure.
- While forex reserves are comfortable at $717.06 billion, with $570.05 billion in foreign currency assets, the cushion isn’t absolute. The Reserve Bank of India maintains a net short forward position of about $66 billion, effectively committed future dollar sales that must be covered eventually.
The implication is subtle yet crucial: even with strong inflows, the RBI may absorb them to rebuild forward positions, limiting sharp rupee gains.
Technically, the 90.50 to 90.80 zone in USD/INR is anticipated to provide strong support. Still, with a global dollar resurgence attempting a rebound and domestic demand for the dollar building, the pair is likely to move toward 92.00 shortly.
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(Disclaimer: The opinions expressed by experts do not necessarily reflect the views of Economic Times.)
(The author Amit Pabari is MD, CR Forex Advisors.)
