Fed’s Hammack: Dollar dominance intact, rates likely on hold for some time

Fed’s Hammack: Dollar dominance intact, rates likely on hold for some time

The U.S. dollar’s dominance in global financial markets remains largely intact despite recent policy uncertainties, according to Federal Reserve officials. The dollar continues to account for over 50% of global foreign exchange reserves, 50% of international payments, and a majority of trade invoicing, far exceeding its share of global GDP or trade according to Federal Reserve analysis. While concerns arose following the Trump administration’s abrupt tariff hikes in 2025—triggering a temporary reversal of the dollar’s traditional safe-haven status— recent data indicate a stabilization in its role as a store of value and medium of exchange.

The Federal Reserve’s January 2026 policy meeting reaffirmed a cautious approach, with the federal funds rate held at 3.50-3.75% amid mixed inflation and labor market signals. Chair Jerome Powell emphasized a data-dependent strategy, noting that inflation, though elevated, has not accelerated as feared, and the labor market shows signs of stabilization according to U.S. Bank analysis. Markets currently price in two 25-basis-point rate cuts by year-end, contingent on continued moderation in inflation and employment trends.

Challenges to dollar dominance, such as geopolitical tensions and the rise of digital currencies, remain theoretical for now. The Fed’s liquidity support—via bond purchases and ample reserves—further underpins confidence in the dollar’s stability. However, long-term risks include fiscal sustainability concerns and potential erosion of institutional trust, particularly if policy volatility persists according to Federal Reserve analysis. For now, the dollar’s entrenched role in global trade, finance, and central bank reserves suggests its dominance will endure, though evolving geopolitical and technological dynamics warrant continued monitoring.

According to Federal Reserve analysis: Federal Reserve (2025), according to CEPR research: CEPR (2025), according to U.S. Bank analysis: U.S. Bank (2026).