The dollar extended losses across major peers on Wednesday after December's Federal Reserve meeting minutes revealed policymakers' growing willingness to recalibrate monetary policy if inflation continues to cool, traders said. The greenback's decline accelerated as market participants increased bets for rate cuts by mid-year, while the Japanese yen strengthened sharply on expectations that the Bank of Japan could raise rates as early as its January meeting.
Market analysts note that the Fed's subtle shift in tone marks a departure from the hawkish rhetoric that dominated late 2025, with several officials now acknowledging that the restrictive policy stance may be approaching its limit. "The minutes suggest the Fed is positioning itself for a more data-dependent approach in the first half of 2026," said a senior currency strategist at a major European bank. The dollar index has now erased nearly all of its fourth-quarter gains, with momentum indicators flashing oversold conditions for the first time since October.
The yen emerged as the primary beneficiary of the dollar's weakness, climbing to its strongest level in four months against the greenback. Traders are pricing in a 70% probability of a BOJ rate hike this month, according to interest rate futures, as Japanese inflation has remained above the central bank's target for eleven consecutive months. The prospect of narrowing interest rate differentials has prompted a rapid unwind of yen-funded carry trades, with positions built up over the past year facing sudden liquidation. Meanwhile, the euro and pound sterling posted more modest gains, with traders citing relatively stable central bank expectations from the ECB and Bank of England.
Gold prices advanced for a fifth straight session, benefiting from both dollar weakness and renewed safe-haven demand amid escalating tensions in the Middle East and uncertainty surrounding US trade policy discussions in the new Congress. Energy markets remained volatile as winter demand patterns collided with concerns about OPEC+ production compliance, while Bitcoin held onto recent gains as institutional flows into crypto investment vehicles resumed after the holiday period. Looking ahead, traders are focused on Friday's US non-farm payrolls report and next week's CPI data, which could either cement or reverse the current dovish Fed repricing. The BOJ's policy decision on January 15 looms as the next major catalyst for yen volatility.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.