The dollar extended its December decline as market participants increasingly focused on the Federal Reserve's upcoming balance sheet policy review, with strategists noting growing speculation about a potential adjustment to the pace of quantitative tightening. The Japanese yen emerged as the primary beneficiary of safe-haven flows amid escalating diplomatic tensions in the Asia-Pacific region, while the euro and British pound consolidated recent gains against the greenback.
Traders are closely monitoring signals from Fed officials expected to speak later this week, with particular attention on any hints regarding the central bank's approach to balance sheet runoff heading into 2026. Market analysts note that the Fed's portfolio reduction has emerged as a key policy lever alongside interest rates, and any shift in strategy could have significant implications for dollar liquidity. The timing coincides with typical year-end rebalancing flows that historically have pressured the dollar, according to currency strategists at major banks.
Geopolitical developments have added another layer of complexity to currency markets, with renewed concerns over regional stability prompting institutional investors to reduce risk exposure. This dynamic has strengthened demand for traditional safe-haven assets, pushing the yen higher against the dollar for a third consecutive session. In commodities, gold has benefited from central bank accumulation and retail investment inflows, with market participants noting strong technical momentum. Oil prices face downward pressure from seasonal demand weakness and inventory builds, while Bitcoin continues to attract institutional interest through ETF products, though volatility remains elevated.
Technical indicators suggest the dollar index is testing key support levels, with momentum oscillators flashing bearish signals that could accelerate selling pressure if breached. The EUR/USD pair is challenging recent highs, while USD/JPY shows signs of breaking below key short-term technical support, according to chart analysts. Looking ahead, traders are positioning for Friday's employment report and next week's inflation data, which could reshape expectations for Fed policy in the first quarter of 2026. Market participants caution that thin holiday liquidity could amplify moves in either direction as the year draws to a close.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.