The dollar extended losses across major currency pairs in subdued Monday trading, with market participants citing year-end portfolio rebalancing and evaporating liquidity as key drivers amplifying the move. Traders say speculative accounts have accelerated their unwind of long-dollar positions, betting that the Federal Reserve will cut rates more aggressively than the European Central Bank and Bank of Japan in 2026. The greenback's decline comes despite relatively steady US economic data, suggesting sentiment rather than fundamentals are dictating price action in the final trading sessions of the year.
The shift in dollar dynamics reflects recalibration of central bank policy expectations following divergent communications in December. ECB policymakers have consistently pushed back against market pricing for deep rate cuts, with Chief Economist Philip Lane emphasizing that services inflation remains "stubbornly elevated" in recent remarks. Conversely, Fed officials have adopted a more balanced tone, with several governors noting that cooling labor market conditions could warrant "insurance cuts" in the first half of 2026. This policy gap has widened the US-Germany two-year yield differential to its narrowest level since early 2023, currency strategists note.
Euro strength has dominated G-10 currency boards, with the single currency posting its longest winning streak since November as it tests technical resistance levels that, if broken, could open the door for further gains in January. The yen has also advanced, buoyed by expectations that the BOJ will hike rates at its January meeting following stronger-than-expected Tokyo CPI data released last week. Commodity currencies present a bifurcated picture: the Australian dollar has rallied on China's expanded qualified foreign institutional investor quota, while the New Zealand dollar lags after soft dairy auction prices. The Canadian dollar remains under pressure as crude oil retreats from recent highs on concerns over global demand growth.
Gold has maintained its upward trajectory, holding near peaks not seen since Q3 2024 as institutional investors increase portfolio allocations to the precious metal. "We're seeing central bank buying resume, particularly from emerging market authorities looking to diversify reserves," said a senior precious metals trader at a major European bank. Bitcoin and ethereum have experienced heightened volatility, with crypto markets caught between year-end tax-loss harvesting and optimism over potential spot ETF approvals in the US and Europe in early 2026. Looking forward, traders are closely watching the January 2nd ISM manufacturing data and the January 8th US employment report, which could either validate or reverse the current dollar weakness heading into the new year.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.