The dollar extended losses for a third consecutive session as weak manufacturing data from late December fueled concerns about U.S. economic momentum, prompting traders to reassess Federal Reserve policy expectations for 2026. The greenback slid broadly against developed-market peers and emerging-market currencies as money managers rotated toward assets more sensitive to global growth recovery.
Disappointing Institute for Supply Management figures released just before the new year showed factory activity contracting at its fastest pace since mid-2023, catching markets off guard and raising questions about the resilience of the world's largest economy. The new orders component, a forward-looking indicator, fell to levels typically associated with recession, according to market analysts. Strategists at major banks note that the data has forced a rapid repricing of Fed expectations, with futures markets now pricing in a higher probability of a 50-basis-point cut at the March meeting. "The manufacturing slump is spilling into services, and that's making investors nervous about the broad growth outlook," said a senior currency trader at a London-based hedge fund.
The dollar's decline has created opportunities elsewhere. The euro and British pound have both broken out of recent trading ranges, with traders citing relative economic stability in Europe despite ongoing energy transition challenges. Commodity currencies including the Australian and Canadian dollars have outperformed, benefiting from supply chain reorganization and stabilizing Chinese demand after Beijing's recent stimulus measures. In precious metals, gold has rallied to multi-month highs as falling real yields and geopolitical tensions in the Middle East and Eastern Europe drive safe-haven demand. Oil prices have remained volatile as traders weigh demand concerns against supply disruptions. Bitcoin has also gained traction among institutional investors seeking alternatives to traditional fiat currencies, with several major asset managers expanding their crypto offerings.
Technical analysts report that the dollar index has breached a key support zone that held throughout the fourth quarter, suggesting further weakness could accelerate if upcoming payroll and inflation data disappoint. The break below the 200-day moving average has triggered algorithmic selling, exacerbating the move. Market participants are now focused on Friday's nonfarm payrolls report and a series of Fed speaker appearances that could clarify the central bank's thinking. Until then, positioning data from the Commodity Futures Trading Commission indicates traders are adding to bearish dollar bets while increasing exposure to currencies tied to global trade recovery. Currency volatility measures have climbed to their highest levels since October, reflecting the uncertainty.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.