Dollar Slides as Traders Bet on Imminent Fed Rate Cut
A weaker greenback provides a tailwind for U.S. multinational stocks as markets price in an 88% chance of a December policy shift.
The U.S. dollar fell to multi-week lows in early December trading as financial markets ramped up bets that the Federal Reserve is preparing to cut interest rates for the first time in its current cycle at its upcoming meeting.
The U.S. Dollar Index (DXY), which measures the greenback against a basket of major currencies, traded below the key 99.00 level following two consecutive weeks of declines. This slide reflects a significant shift in market sentiment, providing a potential boost for U.S. corporate earnings and buoying equity markets.
The move is directly tied to escalating expectations for a monetary policy pivot from the central bank. Traders are now pricing in an approximately 88% probability of a 25-basis-point rate cut at the conclusion of the Fed’s December 9-10 meeting, according to data from the CME FedWatch Tool. This marks a substantial increase from a month ago, when the odds were closer to 67%.
This dovish sentiment has been fueled by a recent string of softer-than-expected economic data. Reports indicating a weakening U.S. labor market and disappointing retail sales have led investors to believe that the Fed’s aggressive rate-hiking campaign has sufficiently cooled the economy, giving policymakers room to ease financial conditions.
A weaker dollar is a significant tailwind for many of the largest U.S. companies. S&P 500 firms derive a substantial portion of their revenue from overseas, and a depreciating dollar means that sales made in euros, yen, or other foreign currencies translate into more dollars when brought home. This accounting benefit can directly boost revenue and earnings-per-share figures, making stocks more attractive to investors.
"The recent dollar weakness has been a key driver of positive performance in U.S. equities," noted analysts at MUFG in a recent research note. The dynamic has also supported commodity prices, which are typically priced in dollars and become cheaper for foreign buyers when the U.S. currency falls.
Investors are now squarely focused on the upcoming Federal Open Market Committee (FOMC) meeting for confirmation of their dovish outlook. A Reuters poll of economists aligns with market pricing, showing a strong consensus for a quarter-point rate reduction. However, the market will be scrutinizing the central bank's accompanying statement and economic projections for clues on the potential pace and scale of future cuts in 2026. Any indication that the Fed plans a more gradual easing cycle than currently priced in could trigger a sharp reversal in the dollar's recent downtrend.