The dollar extended declines against commodity-linked currencies on Wednesday, with the Australian and Canadian dollars reaching multi-month peaks as Federal Reserve policy expectations shifted and optimism over Chinese stimulus measures lifted risk sentiment across global markets.
Market participants are increasingly positioning for a prolonged Fed pause into 2026 after recent comments from policymakers suggested inflation concerns have moderated. "The Fed's tone has notably softened over the past two weeks," said Sarah Chen, head of G10 strategy at Meridian Capital. "Traders are now pricing in a higher probability of rate cuts by mid-2026, which is weighing on dollar carry trades." This dovish repricing coincides with reports that Chinese authorities are considering additional support measures for the property and manufacturing sectors, boosting demand prospects for industrial metals and energy exports.
The Australian dollar has broken above key technical resistance levels, with momentum indicators showing the strongest bullish conditions since early September. The currency is benefiting from both the broader dollar weakness and a sharp rally in iron ore and copper prices. Meanwhile, the Canadian dollar is gaining ground as crude oil futures maintain their upward trajectory and the Bank of Canada maintains a relatively hawkish stance compared to its G7 peers. Technical analysts note that USD/CAD has breached its 200-day moving average, a development that could accelerate further downside if year-end hedge fund rebalancing continues to favor Canadian assets.
Looking ahead, traders are closely watching Thursday's U.S. inflation data and Friday's consumer sentiment report for further clues on Fed policy direction. "Any downside surprise in CPI could trigger another leg lower for the dollar, particularly against commodity currencies," noted Michael Torres, senior FX trader at Pacific Global Markets. However, some strategists caution that thin December liquidity conditions may amplify moves in both directions, and a sudden shift in risk appetite could quickly reverse recent trends if geopolitical tensions resurface or Chinese policy announcements disappoint.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.