The dollar steadied against major peers on Monday after a volatile week, as Federal Reserve officials signaled the central bank may pause its aggressive easing campaign at the December meeting, prompting traders to reassess rate-cut expectations for 2026. The greenback's stabilization comes as China's National Development and Reform Commission unveiled new fiscal support measures, sending the Australian and New Zealand dollars sharply higher while commodity-linked assets attracted renewed institutional interest.
According to senior traders at major Wall Street banks, Fed communications since the November meeting have grown incrementally hawkish, with several regional Fed presidents noting that inflation has shown "stubborn persistence" in recent months. "The market had priced in an overly dovish Fed for the first half of 2026," said a currency strategist at a European asset manager. "Now we're seeing a violent repricing of that terminal rate assumption." Fed funds futures now suggest a 60% probability of a hold decision on December 18, compared to near-certainty for a cut just two weeks ago.
The policy recalibration is creating ripple effects across currency markets. The yen has firmed against the dollar as the US-Japan rate differential narrows, though gains remain measured as the Bank of Japan continues its gradual normalization path. Meanwhile, the Chinese yuan's inclusion in the stimulus package—via increased infrastructure spending and targeted monetary easing—has ignited rallies in the Australian dollar and emerging market currencies tied to Chinese demand. Gold prices extended their upward trajectory, benefiting from both lower real yields and persistent geopolitical hedging demand from sovereign wealth funds.
Technical positioning suggests the dollar index is testing a critical support zone that has held since September, with momentum indicators flashing divergent signals. Portfolio managers note that hedge funds have begun unwinding crowded short-dollar positions, while real-money accounts are using the volatility to rebalance currency hedges ahead of year-end reporting. "The December 15 options expiry could exacerbate moves if we break key technical levels," warned a senior FX trader in London. Looking ahead, market participants are laser-focused on Wednesday's US CPI data and Fed Chair Powell's final press conference of 2025, which will set the tone for first-quarter positioning.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.