The dollar weakened on Monday (December 8th), ahead of a busy week of central bank meetings led by the US Federal Reserve, where a rate cut is widely expected, although a deeply divided committee is an unexpected factor.

In addition to the Fed's decision on Wednesday, the central banks of Australia, Brazil, Canada, and Switzerland also hold rate-setting meetings, although none of those meetings are expected to change monetary policy.

Analysts expect the Fed to deliver a "hawkish" rate cut, with the language of the statement, median projections, and Chairman Jerome Powell's press conference suggesting a higher bar for further rate cuts.

That could support the dollar if it encourages investors to reduce expectations for two or three rate cuts next year, although messaging could be complicated by divisions among policymakers, as some have already indicated their intention to vote.

HIGH RISK OF DISSENT

"We expect to see some dissent, from both hawkish and dovish members," said BNY's chief macro market strategist, Bob Savage, in a note to clients.

The Federal Open Market Committee (FOMC) hasn't had three or more dissents in a single meeting since 2019, and it's happened only nine times since 1990.

Although the US currency has weakened over the past three weeks, bullish dollar investors have recovered some of their steam. Weekly positioning data shows speculators maintain their largest long positions—those assuming the dollar will appreciate—since before President Donald Trump's "Liberation Day" tariff surprise caused the currency to plunge.

The labor market is weakening, but overall growth remains robust, stimulus from the "One Big Beautiful Bill" should be starting to kick in, and inflation remains well above the central bank's 2% target interest rate. "These factors could discourage additional interest rate cuts if they result in stronger labor market conditions," said MUFG currency strategist Lee Hardman.

Euro Lifted by Rising Yields

Excluding US monetary policy, the euro edged up 0.1% to $1.1652, boosted by higher eurozone bond yields. The yield on the German 30-year bond hit its highest level since 2011 in early trading.

Unlike the Fed, the ECB is not expected to cut interest rates again next year. Influential policymaker Isabel Schnabel said on Monday that the central bank's next move could even be a rate hike.

The Australian dollar briefly touched a high of $0.6649, its highest since mid-September, before last trading down 0.1% on the day at $0.6635.

The Reserve Bank of Australia will meet on Tuesday after a series of key data on inflation, economic growth, and household spending. Futures suggest the next move will be higher, possibly as early as May, so the focus will be on the post-meeting statement and press conference.

"We expect the RBA to keep its benchmark interest rate on hold for the long term, with the cash rate remaining at its current level of 3.60%," analysts at ANZ said in a note last week, revising previous expectations for a rate cut.

CANADA EXPECTED TO STAY ON HOLD

The Bank of Canada is also expected to keep rates on hold on Wednesday, with a full rate hike expected by December 2026. The currency was steady at C$1.3819 on Monday, after hitting a 10-week high on Friday following strong employment data.

The yen, which has stabilized in the past week after weakening sharply in November, was mostly steady at 155.44 per dollar, while the pound held around $1.3325 and the Swiss franc strengthened slightly at 0.804 franc. (alg)

Source: Reuters.com