The dollar extended its decline against major currencies on Monday as traders positioned for the Federal Reserve to pause its easing cycle at this week’s policy meeting, with market participants citing renewed focus on central bank divergence and year-end liquidity dynamics. The greenback faced broad-based selling pressure across G10 and emerging market currencies, according to traders at major banks.
Market analysts note that expectations for the Fed to maintain its benchmark rate have solidified following recent economic data showing resilient consumer spending alongside moderating inflation. "The Fed has likely reached a neutral stance for now," said a senior currency strategist at a major European bank. "Markets are pricing in a higher probability of an extended pause, which is weighing on dollar carry trades." The European Central Bank’s cautious tone at its early December meeting has meanwhile provided support for the euro, while the Bank of Japan’s anticipated communication on yield curve policy continues to drive yen positioning.
Euro strength gathered momentum as traders interpreted ECB President Lagarde’s recent comments as signaling concern over eurozone growth prospects, potentially limiting the pace of future rate cuts. Sterling also advanced against the dollar, buoyed by better-than-expected UK employment figures and reduced political uncertainty following recent fiscal policy clarifications. In Asia, the yen attracted safe-haven flows amid geopolitical tensions in the Middle East, with market participants also positioning for potential hints of further policy normalization from the BoJ’s December meeting. Commodity-linked currencies including the Australian and Canadian dollars benefited from firmer energy prices and improved risk sentiment.
Gold prices trended higher for a fourth consecutive session as investors sought portfolio hedges against geopolitical uncertainty and potential equity market volatility into year-end. Crude oil futures maintained upward momentum amid ongoing supply concerns from Middle Eastern producers, with traders watching for potential OPEC+ production adjustments in early 2026. Bitcoin and broader cryptocurrency markets saw increased institutional interest, though analysts caution that regulatory clarity remains a key variable for sustained capital inflows. Technical indicators suggest the dollar index is testing key support levels that, if broken, could accelerate downside moves toward levels not seen since early 2024, strategists note.
Looking ahead, traders say positioning data indicates continued dollar selling pressure through the holiday period, with many investors reluctant to add long-dollar exposure before the new year. "The combination of a Fed pause, ECB caution, and BoJ normalization expectations creates a challenging environment for dollar bulls," said a head of foreign exchange trading at a New York-based asset manager. Market participants will scrutinize the Fed’s dot plot projections and Chair Powell’s press conference for clues on the 2026 policy trajectory, while also monitoring liquidity conditions that typically thin in the final two weeks of December.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.