The dollar extended losses in early London trading Wednesday after U.S. manufacturing activity contracted more than forecast in November, leading traders to question whether the Federal Reserve has scope for additional rate cuts in the current cycle. The greenback declined against all Group-of-10 counterparts, with the euro and sterling leading gains while the Japanese yen strengthened on renewed central bank speculation.
According to market strategists, the Institute for Supply Management's manufacturing index fell deeper into contractionary territory, fueling debate about the resilience of the U.S. economy as the Fed approaches its December policy meeting. "The data suggests the manufacturing sector is feeling the lagged effects of monetary tightening more acutely than previously thought," said senior currency analysts at major dealing banks. Fed officials speaking Tuesday offered mixed signals, with some emphasizing data-dependence while others expressed concern about cutting rates too aggressively into economic weakness.
The yen emerged as the standout performer after Bank of Japan board members hinted at accelerating the pace of policy normalization in 2026, citing progress toward the bank's inflation target. USD/JPY experienced two-way volatility as traders unwound carry trades amid speculation that the BoJ could deliver back-to-back rate increases in the first quarter. Meanwhile, commodity-linked currencies including the Australian and Canadian dollars advanced alongside improved risk appetite, with equity markets rallying on hopes for additional Chinese stimulus measures to support property sector stabilization.
From a technical perspective, traders note that the dollar index has broken below a key support zone that held throughout November, opening the door for further weakness into year-end. Positioning data indicates hedge funds have reduced long-dollar exposure for three consecutive weeks, while real-money accounts are actively hedging currency risk ahead of 2026 portfolio rebalancing. Volatility surfaces in major currency pairs have steepened, reflecting uncertainty around Friday's nonfarm payrolls report and the upcoming FOMC decision.
Looking ahead, market participants are closely watching the ISM services data due later Wednesday for confirmation that the weakness is isolated to manufacturing rather than broad-based. The November employment report Friday looms as the next major catalyst, with economists expecting moderation in job creation but not a dramatic slowdown. Currency strategists say the dollar's path will depend on whether the data supports a Fed pause or leaves the door open for further easing in early 2026.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.