Dollar Weakens as Fed Signals Dovish Tilt, Markets Anticipate Two Rate Cuts in 2026

The U.S. dollar dipped on Thursday after the Federal Reserve delivered a less hawkish outlook than investors had anticipated, fueling expectations for further monetary easing in 2026. The dollar had reached a two-month peak earlier but fell as traders digested the Fed’s signals and positioned for potential rate cuts. Key inflation data scheduled for later in the day added an extra layer of caution to the markets.

At the conclusion of its two-day policy meeting, the Fed lowered interest rates by 25 basis points, in line with forecasts. However, remarks from Chair Jerome Powell at the post-meeting press conference surprised some analysts who had expected a more aggressive stance. “For us, the big takeaway was a dovish tilt to the accompanying commentary and at Fed Chair Powell’s press conference,” said Nick Rees, head of macro research at Monex Europe.

Investors responded by selling the dollar, which allowed the euro to climb above the $1.17 mark, approaching a two-month high of $1.1705 in early Asian trading. Sterling surged to a 1½-month peak of $1.3391, while the Japanese yen gained 0.25% to 155.64 per dollar. The broader dollar index fell to 98.543, its lowest level since late October. Tony Sycamore, a market analyst at IG, noted that the Fed’s calmer tone provided “the green light for risk assets to rally into year-end.”

Market expectations now point to two additional rate cuts in 2026, exceeding the Fed’s median projection of a single full-percentage-point reduction. In a related move, the central bank announced it would begin purchasing short-dated Treasury bills starting December 12, totaling around $40 billion, to support liquidity. The announcement provided a boost to bond markets, with two-year Treasury yields falling 3 basis points to 3.534% and 10-year yields similarly declining to 4.133%.

Other currencies saw mixed reactions. The Australian dollar retreated slightly from a three-month high to $0.66665, while the New Zealand dollar eased 0.07% to $0.5812. Analysts attribute the fluctuations to ongoing global interest rate differentials, especially between Japan and the rest of the world, as traders continue to adjust to the Fed’s dovish signals.

source: cnbc