The dollar extended declines against major peers in early December trading as markets digested Federal Reserve Chair Jerome Powell's clearest signal yet that the central bank may begin cutting rates in the first half of 2026, while European Central Bank policymakers aggressively countered market expectations for steep easing.
Powell's comments at a late November conference on monetary policy indicated the Fed sees substantial progress on inflation and noted the labor market has cooled considerably, according to traders who interpreted the remarks as opening the door to a policy pivot. Fed funds futures now suggest increased probability of a cut by mid-2026, compared to pricing just two weeks ago. The greenback's weakness was broad-based, with the euro and sterling gaining ground while the yen strengthened on renewed policy divergence.
The ECB's Governing Council members pushed back forcefully against market pricing for substantial cuts next year. Dutch central bank chief Klaas Knot said underlying inflation remains stubbornly elevated above the 2% target, while his French counterpart suggested markets are getting ahead of themselves. Meanwhile, Bank of Japan Governor Kazuo Ueda reiterated that the central bank remains on course to normalize policy further, with market analysts noting the yen's appreciation reflects growing confidence in the BoJ's commitment to exit ultra-loose monetary settings.
Geopolitical tensions continue to support safe-haven demand for gold, which is trending higher alongside the dollar's weakness—a dynamic that traders say reflects both falling real yields and persistent concerns over trade policy uncertainty. Crude oil remains volatile after OPEC+ delayed a key meeting on production quotas, while Bitcoin's correlation with traditional risk assets has diminished, according to digital asset strategists. Technical momentum indicators show the dollar index approaching oversold territory, though positioning data suggests further declines may be limited ahead of key US economic data.
Market structure analysis indicates that year-end rebalancing flows are amplifying the moves, with institutional investors reducing dollar exposure as the Fed's policy outlook shifts. Strategists note that the break of key technical support levels has triggered stop-loss selling, though retail positioning remains less bearish. Looking ahead, traders are focused on Friday's US employment report and next week's inflation data, which could either validate or reverse the current dovish Fed pricing. The divergence in central bank communication suggests volatility will persist through the December FOMC meeting, with the dollar's trajectory increasingly dependent on incoming economic data rather than policy guidance alone.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.