The dollar strengthened broadly on Thursday after the Federal Reserve's December policy meeting delivered a hawkish surprise, with officials projecting fewer rate cuts for 2026 than markets had priced. The revised "dot plot" suggested the central bank would maintain its benchmark rate above 4% through the first half of next year, prompting traders to unwind leveraged positions in higher-yielding currencies.
Market participants say the Fed's stance contrasts sharply with more dovish signals from the European Central Bank and Bank of England earlier this month, creating fresh divergence in monetary policy trajectories. "This resets the entire G10 landscape," noted a senior currency strategist at a major Wall Street bank. "Carry trades that looked attractive two weeks ago are suddenly under intense pressure." The shift sparked particular selling in the Australian and New Zealand dollars, both of which had benefited from yield-seeking flows through November.
The euro showed relative resilience, holding steady against the greenback as traders noted the ECB's more aggressive easing bias could ultimately support European growth. Meanwhile, the yen weakened modestly as the U.S.-Japan rate differential widened, though losses were cushioned by seasonal repatriation flows from Japanese corporations settling year-end accounts. Commodity currencies faced the steepest declines, with crude oil's recent slide amplifying pressure on the Canadian dollar. Gold prices retreated from recent highs as the dollar's ascent diminished the metal's appeal, though central bank buying continued to provide underlying support.
Looking ahead, traders are focused on next week's U.S. inflation data and the final batch of economic releases before the holiday-thinned trading period. Positioning surveys indicate speculators have trimmed dollar shorts significantly, suggesting the rally may have room to extend. Technical analysts note the dollar index has broken above a key trendline that had capped gains since October, potentially opening the door for further upside into the new year. "The momentum is clearly shifting," said one London-based hedge fund manager. "We could see this trend accelerate as liquidity evaporates next week."
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.