Weakening Dollar Signals Fed Rate Cut Path Amid Manufacturing Slump

Economic Weakness Drives Dollar Drop

Mounting evidence of economic deceleration has pushed the U.S. dollar into a seventh consecutive session of decline, with the Dollar Index retreating to 99.408 during Asian trading. The greenback’s weakness reflects growing conviction that the Federal Reserve will ease monetary policy in coming weeks, fundamentally reshaping currency market dynamics.

Manufacturing Contraction Intensifies Rate Cut Narrative

The latest purchasing managers’ index painted a grim picture of industrial activity, with the PMI sliding to 48.2—marking the ninth consecutive month of contraction. Eroding demand signals, particularly evident in new orders and staffing levels, combined with mounting input costs driven by tariff pressures, have cemented economist expectations for immediate monetary accommodation. ANZ’s G3 economics head Brian Martin explicitly argued for not one but multiple rate cuts, projecting as much as 50 basis points of easing throughout 2026.

Market Fully Prices in December Action

Futures contracts now embed an 88% probability that the Fed will deliver a 25-basis-point reduction at its December 10 meeting—a dramatic shift from the 63% likelihood traders assigned just four weeks earlier. This repricing reflects capital markets’ swift recalibration to newly soft economic data and shifts the baseline assumption away from extended monetary restraint.

Currency Landscape Reshapes Amid Policy Divergence

Beyond the dollar drop, currency movements reflected nuanced central bank positioning. The Japanese yen held steady at 155.51 against the greenback, even as Bank of Japan Governor Kazuo Ueda suggested the institution would carefully weigh rate hike considerations. His commentary proved powerful enough to push two-year Japanese yields past 1% for the first time since 2008. The euro remained anchored at $1.1610 as diplomatic developments regarding Ukraine continued shaping risk sentiment, while sterling climbed to $1.3216 following fiscal watchdog turmoil in the U.K. The Australian dollar and New Zealand dollar traded with minimal movement at $0.6544 and $0.5727, respectively.

Treasury Market Turbulence

The 10-year Treasury yield climbed to 4.086% following global bond market selling pressure, highlighting the complex interplay between growth concerns and inflation expectations as markets digest incoming Fed policy direction.