The dollar eased Monday as global investors positioned for a pivotal week dominated by the highly anticipated Fed interest rate decision, a move widely expected to deliver a cut paired with unusually firm guidance.
Currency markets have drifted lower for three straight weeks, yet traders continue to rebuild bullish bets ahead of the central bank’s announcement.
The Federal Reserve will conclude its meeting Wednesday, marking one of the most scrutinized sessions of the year. Analysts expect policymakers to approve an interest rate cut but pair it with language signaling caution on further easing.
In addition to the Fed interest rate decision, major central banks in Australia, Brazil, Canada and Switzerland will also publish their policy outcomes this week. None are expected to adjust rates, though investors say forward guidance could influence global bond markets.
The US dollar’s recent weakness contrasts with strong speculative positioning. Futures data shows traders now hold their largest net long position since before former President Donald Trump’s tariff announcement that rattled global markets several years ago.
Economists said the Fed faces a complicated moment, with the policy committee deeply divided over how aggressively to ease in the coming year.
“We expect dissent from both hawks and doves, which is rare,” said Bob Savage, head of markets macro strategy at BNY. “The messaging around the Fed interest rate decision may be the biggest catalyst for volatility this week.”
The US economy has shown mixed signals. Inflation remains above the two percent target, while labor conditions continue to soften gradually. MUFG currency strategist Lee Hardman said those dynamics could force policymakers to slow the pace of cuts.
“The data is not weak enough to justify rapid easing,” he said. “If inflation stabilizes at higher levels, the Fed may be reluctant to deliver more cuts after this one.”
The last time the Federal Open Market Committee saw three or more dissents was in 2019, underscoring how unusual this division would be.
Even as the dollar eased early Monday, other major currencies strengthened. The euro rose 0.1 percent to $1.1652, supported by rising euro zone bond yields.
German thirty-year yields reached their highest level since 2011, reflecting expectations that the European Central Bank will likely hold rates steady for the coming year.
Some ECB officials have taken a firmer stance. On Monday, policymaker Isabel Schnabel said the bank’s next adjustment could even be a hike, though economists say the bar remains high.
In Asia, the Australian dollar hit a two month high before pulling back slightly. The Reserve Bank of Australia meets Tuesday following strong data on consumer spending, inflation and GDP growth.
Traders increasingly expect the next move to be a hike, potentially by May. Against this backdrop, the Fed interest rate decision remains the most influential global event of the week, analysts said.
Currency traders said they expect sharp swings if the Fed delivers a more hawkish tone than markets anticipate. “Everyone knows a cut is coming, but no one knows how strong the warning will be,” said New York based trader Michael Reyes.
“The entire market is waiting on the Fed interest rate decision because that alone could set the tone for the next quarter.”
In Frankfurt, retail investor Claudia Hartmann said rising yields have boosted European market confidence. “People feel the ECB is being more cautious,” she said. “There’s a sense that rate cuts may not return as quickly as some expected.”
In Sydney, small business owner Jordan Clarke said consumers appear resilient despite high borrowing costs. “Spending hasn’t cooled the way economists predicted,” he said. “If this continues, the RBA may have to tighten.”
Analysts expect cautious trading ahead of Wednesday’s announcement, with the dollar likely to remain rangeBbound. A hawkish cut could push the greenback higher if the committee hints at only one additional cut for 2025.
Markets will also study statements from the Bank of Canada, Swiss National Bank and Brazil’s central bank. But economists said the Fed interest rate decision will dominate global financial sentiment through the week.
As the dollar eased and investors positioned for a week of critical policy announcements, the focus remains squarely on the Fed interest rate decision.
With a divided committee, stubborn inflation and shifting labor data, policymakers face one of their most delicate balancing acts in years. The outcome may determine not only the dollar’s next direction but the pace of global monetary easing in 2025.
