Rate Cut Bets Trigger Dollar Drop as Manufacturing Sector Weakens Further

The U.S. dollar experienced a significant pullback this week, driven by deteriorating manufacturing conditions that have bolstered market expectations for Federal Reserve action. The dollar drop became evident as the U.S. Dollar Index descended to 99.408 during Asian trading, marking its seventh consecutive session of decline and dipping to two-week lows amid a broader retreat in equity and fixed-income markets.

Manufacturing Contraction Deepens, Fueling Rate Cut Expectations

The weakness in manufacturing activity remains the primary catalyst for near-term monetary policy expectations. November data showed the Institute for Supply Management’s Purchasing Managers’ Index at 48.2, extending the sector’s contraction streak to nine consecutive months as October’s reading of 48.7 deteriorated further. The decline reflects slowing new orders and employment losses, compounded by elevated input costs stemming from persistent tariff pressures, according to analysis from ANZ’s G3 economics team in London.

Economists now anticipate more aggressive rate adjustments ahead. Brian Martin, head of G3 economics, projects not only a reduction in the December policy meeting but also expects roughly 50 basis points of additional cuts throughout 2026, signaling a potential shift toward monetary accommodation.

Market Pricing Solidifies December Rate Cut Probability

The repricing of Federal Reserve expectations has accelerated sharply. CME Group’s FedWatch tool now indicates an 88% probability of a 25-basis-point rate cut when policymakers convene on December 10—a substantial jump from just 63% probability one month ago. This recalibration reflects how dramatically market participants have adjusted their outlook in response to economic crosscurrents.

Divergent Currency Movements Reflect Global Policy Divergence

The dollar’s weakness unfolded amid mixed signals from other central banks. The Japanese yen held firm at 155.51 against the greenback, unchanged from late U.S. trading, while Bank of Japan Governor Kazuo Ueda signaled the institution would evaluate both advantages and drawbacks of a potential rate increase at its upcoming session—commentary that drove Japanese two-year yields above 1% for the first time since 2008.

Elsewhere, the euro maintained stability near $1.1610 as diplomatic efforts surrounding the Ukraine conflict continued to provide support for market sentiment. The British pound remained resilient at $1.3216, hovering near month-long highs following the departure of the Office for Budget Responsibility chief amid budgeting transparency issues.

The Australian dollar showed minimal movement at $0.6544, while the New Zealand kiwi traded at $0.5727 as the Asian session commenced, both currencies reflecting limited volatility in early regional trading.

The 10-year U.S. Treasury yield rose to 4.086% following international bond market weakness, illustrating how rate expectations and currency valuations remain tightly interwoven amid broader market repositioning.