Fundamental Drivers: Will a ‘Hawkish Cut’ Reinforce the Dollar?
Markets are fully prepared for a Fed rate cut, but analysts expect a hawkish tone that could counter the easing step. A firmer message on the bar for additional rate reductions would support the dollar because it narrows the expected path of future easing and raises relative yield advantages. Committee divisions add uncertainty, with potential dissents from both sides, reinforcing the view that policymakers are not aligned on the pace of accommodation.
Speculative traders hold their largest long dollar position since before the Trump-era tariff shock. Stronger positioning helps underpin the index because it reflects ongoing demand for dollar exposure even after three weeks of mild losses. Growth conditions remain resilient, inflation is still above the 2% goal, and fiscal stimulus from the administration’s latest bill is expected to add support. These elements reduce the urgency for multiple cuts, a setup that can limit downside follow-through in the DXY.
Foreign Currencies: Euro Yield Support, Steady CAD, Softer Yen
The euro gained to $1.1672 as euro zone yields climbed, with German 30-year rates hitting their highest level since 2011. However, the single currency has since given back those gains. Higher European yields can attract flows away from the dollar, but the ECB’s stance—where another hike is possible—creates a mixed backdrop.
The Canadian dollar held firm after strong jobs data, reinforcing expectations the Bank of Canada stays on hold, however, gains quickly disappeared. The yen weakened, pushing the dollar to 155.986, while sterling steadied near $1.3325 and the Swiss franc slipped slightly. These cross-currency moves kept broad dollar interest supported even as traders assessed incoming central-bank risks.
Yields and Risk Conditions: Treasury Curve Firming Ahead of Fed
U.S. Treasury yields rose across the curve, with the 10-year near 4.182% and the 2-year at 3.606%. Higher yields tend to support the dollar because they lift relative returns on U.S. assets. Markets now price an 87% chance of a 25-bp cut, up from 67% a month ago, helped by softer labor indicators and firm GDP estimates. Strong holiday-season spending guidance also reinforces overall economic footing.
