Dollar Retreats as Manufacturing Slump Fuels Expectation for Fed Rate Cut This Month

Weak Economic Data Reshapes Market Outlook

The greenback faced mounting selling pressure Tuesday as fresh economic indicators suggested the Federal Reserve would likely move forward with interest rate reductions at its December meeting. The weakness in the manufacturing sector has become impossible to ignore, prompting traders to dramatically reassess their expectations for monetary policy adjustments in the coming weeks.

Manufacturing Contraction Deepens Concerns

The trend in U.S. factory activity tells a sobering story. November’s Institute for Supply Management manufacturing Purchasing Managers’ Index slid to 48.2, marking the continuation of a nine-month contraction streak and declining from October’s 48.7 reading. Alongside the headline weakness, the report showed deterioration in new orders and employment levels, while input costs remained elevated due to ongoing tariff pressures constraining import dynamics.

Brian Martin, head of G3 economics at ANZ in London, interprets these signals as pointing toward reduced economic momentum. The analyst not only expects a rate reduction in December but projects an additional 50 basis points of monetary easing throughout 2026, underscoring the depth of concerns about slowing demand.

Market Pricing Reflects Rate Cut Probability

Financial markets have rapidly adjusted their positioning. Fed funds futures now price in an 88% probability that the central bank will approve a 25-basis-point rate cut when it convenes December 10—a substantial jump from the 63% probability quoted just four weeks ago, according to CME Group’s FedWatch tool. This shift demonstrates how dramatically sentiment has shifted based on the economic data flow.

Dollar Index Under Pressure

The U.S. Dollar Index, measuring the currency’s strength relative to a basket of six major currencies, retreated to 99.408 during Asian trading. This marks a seventh consecutive daily decline and represents the lowest level posted in approximately two weeks, following the broader risk-off sentiment that swept through equity and fixed-income markets during the previous U.S. session.

Treasury Yields Rise Amid Global Bond Selling

The 10-year U.S. Treasury yield climbed to 4.086% after international bond markets experienced a significant selloff Monday, adding another layer to the shifting market dynamics as investors recalibrated their positioning across multiple asset classes.

Currency Pairs Show Mixed Signals

The dollar traded at 155.51 yen, unchanged from late U.S. trading, even as Bank of Japan Governor Kazuo Ueda’s recent comments about weighing the “pros and cons” of a future rate hike proved supportive for the Japanese currency. His remarks contributed to Japanese two-year yields breaking above 1% for the first time since 2008.

The euro maintained stability at $1.1610 in the Asian session, with diplomatic activities regarding Ukraine peace negotiations providing underlying support for risk sentiment. Meanwhile, the British pound sat at $1.3216, remaining near its strongest level in a month following turmoil at Britain’s fiscal watchdog. The Australian dollar held steady around $0.6544, while the New Zealand dollar remained near $0.5727 with minimal activity at the open of Asian trading.

Implications for Market Participants

The convergence of weak manufacturing data and elevated rate cut expectations signals a potential turning point for currency valuations. Investors watching dollar positioning ahead of the December 10 announcement should monitor any additional economic data that could reinforce or challenge the current consensus for monetary easing.