The US dollar index (DXY) continued its rebound at the beginning of the week, rising to around 98.60 in Asian trading, marking its second consecutive day of gains.

A significant cooling of market risk appetite was the main driver of the dollar's strength. Over the weekend, news of a large-scale US military operation against Venezuela and the detention of the country's president sparked global market concerns about escalating geopolitical tensions, leading to a rapid flow of safe-haven funds into the dollar.

Meanwhile, US President Trump's tough stance towards several Latin American countries has exacerbated market concerns about regional stability. Amidst this rising uncertainty, the US dollar, as the world's primary reserve currency, has once again highlighted its safe-haven appeal, receiving significant short-term support.

Regarding monetary policy, the market still holds a dovish expectation for the Federal Reserve's future path. Although the Fed has already cut interest rates by a total of 75 basis points in 2025 and lowered them by another 25 basis points in December, investors still expect there may be room for two more rate cuts in 2026.

The FOMC meeting minutes show that most officials believed that pausing further interest rate cuts was an appropriate option given the gradual decline in inflation, which to some extent limited the upside potential of the US dollar in the medium term.

In addition, discussions surrounding the selection of a new Federal Reserve Chair have also drawn market attention. With the current chair's term nearing its end, the market anticipates that the new chair may adopt a more dovish policy stance, which could put potential pressure on the dollar in the medium to long term.

However, judging from the current pace, risk aversion has temporarily outweighed expectations of interest rate cuts, keeping the US dollar strong. Going forward, the market will focus on the upcoming ISM Manufacturing PMI data to determine if there are any new changes in US economic momentum, which will provide further guidance for the US dollar index.

From a technical perspective, the US dollar index is showing signs of a corrective rebound in the short term. On the daily chart, the index has closed positive for several consecutive days after stabilizing at previous lows, indicating that buying support is strengthening and it is likely to test the upper-middle edge of the previous trading range in the short term.

Momentum indicators are gradually improving, reflecting a weakening of bearish pressure, but the overall trend remains within a medium-term correction structure. If the index can hold its current support level and further increase in volume, the rebound is expected to continue.

Conversely, if upward momentum weakens, the risk of another pullback should be guarded against.


Editor's Note:

In summary, the current strength of the US dollar index is more due to the temporary safe-haven demand triggered by geopolitical risks, rather than a fundamental shift in fundamentals or monetary policy expectations.

The US dollar remains resilient in the short term as global uncertainties persist, but from a medium-term perspective, its rebound may be limited if expectations of further easing by the Federal Reserve resurface. While focusing on the safe-haven logic, close attention should also be paid to the impact of changes in macroeconomic data on the rebalancing of market sentiment.