Federal Reserve's Policy Pivot Triggers Sharp Dollar Retreat Across Major Currency Pairs

The greenback experienced a pronounced slide this week as market participants recalibrated expectations around the Fed’s monetary direction. What initially appeared to be a straightforward 25 basis point rate cut morphed into a broader reassessment of the central bank’s longer-term intentions, sending the dollar to levels not seen in several months against key trading partners.

The critical turning point came with how Fed Chair Jerome Powell’s remarks were interpreted. While Powell avoided overt dovish language, his openness to further cuts ahead diverged sharply from the more aggressive tone emanating from other Group of 10 central banks. The Australian Reserve Bank and European Central Bank have signaled their readiness to tighten monetary conditions, creating a widening policy gap. “The market had more hawkish-leaning expectations going into the Fed meeting,” explained Vassili Serebriakov, FX strategist at UBS, highlighting the disconnect between what investors anticipated and what the Fed actually communicated about its stance deutsch—the pragmatic approach balancing multiple economic signals.

Currency Market Reaction and Dollar Weakness

The repricing of Fed expectations manifested immediately across foreign exchange markets. The euro strengthened 0.4% to reach $1.1740, marking its highest point since early October, while sterling held steady at $1.3387 after touching two-month highs. Against the Japanese yen, the dollar contracted 0.3% to 155.61. The Swiss franc emerged as the session’s strongest performer, with the dollar sliding 0.6% to 0.7947—its lowest level since mid-November—following the Swiss National Bank’s decision to hold rates at zero.

SNB Chairman Martin Schlegel emphasized that despite inflation falling short of targets, negative rate policy remains off the table. The central bank cited improved economic outlook stemming from recent U.S. tariff concessions on Swiss goods. This hawkish-lite stance provided tailwinds for the franc even as other safe havens struggled.

Labor Market Deterioration Compounds Dollar Pressure

Weakness in employment data accelerated the dollar’s descent. Initial jobless claims jumped 44,000 to a seasonally adjusted 236,000 for the week ending December 6—the largest weekly increase in nearly four-and-a-half years. This Labor Department release signaled mounting softness in the U.S. labor market, contradicting assumptions of economic resilience that might have supported currency demand.

The Australian dollar particularly suffered, easing 0.2% to $0.6663 after employment fell in November by the largest margin in nine months, adding to broader weakness in commodity-linked currencies.

Massive Fed Liquidity Injection Reshapes Risk Dynamics

Beyond the rate cut announcement, the Federal Reserve unveiled plans to purchase short-dated government bonds commencing December 12, with an initial allocation of $40 billion. Combined with $15 billion in T-bill reinvestment from maturing mortgage-backed securities, this $55 billion liquidity operation creates favorable conditions for riskier assets while simultaneously pressuring traditional safe-haven currencies like the dollar.

This accommodation-oriented stance deutsch—injecting substantial purchasing power into financial markets—benefits equities and emerging market assets at the expense of the greenback’s traditional safe-haven appeal.

Cryptocurrency and Risk Asset Positioning

The combination of lower U.S. rates and expanded liquidity began favoring risk-on positioning. Bitcoin declined 1.5% to $91,008 following a dip below $90,000, while Ether fell over 4% to $3,200 amid broader technology sector turbulence sparked by disappointing Oracle earnings results. Rising AI infrastructure costs threatening margin compression have sparked concerns about near-term profitability, temporarily dampening investor appetite for growth-oriented assets.

Outlook: Dollar Facing Structural Headwinds

The week’s developments crystallize a fundamental shift in Fed policy direction relative to global central bank trajectories. The divergence between U.S. rate cut prospects and tightening signals from Australia, Europe, and even Switzerland suggests continued dollar depreciation pressure in coming sessions. Labor market deterioration, while concerning from a broader economic standpoint, removes one pillar supporting currency demand, leaving the greenback vulnerable to further losses against its major counterparts.