Why Is the Dollar Weakening? Fed Rate Cut Signals and Manufacturing Slump Point to Further Declines

The dollar’s recent slide reveals a critical shift in market expectations—and manufacturing data is driving it all. Across major currency pairs, traders are recalibrating positions as signals from the Federal Reserve suggest rate cuts are coming sooner than previously anticipated.

Manufacturing Collapse Fuels Rate Cut Bets

The narrative is straightforward: when the economy slows, the Fed cuts rates, and that’s bearish for the dollar. U.S. manufacturing just delivered the evidence markets were waiting for. The Institute for Supply Management’s Purchasing Managers’ Index dropped to 48.2 in November (down from 48.7 the previous month), marking the ninth consecutive contraction in the sector.

What makes this particularly significant is the cascading effect. New orders are drying up, employment is softening, and input costs are climbing due to persistent import tariffs—all pointing to a cooling economy that likely won’t sustain current interest rate levels. According to Brian Martin, head of G3 economics at ANZ in London, these conditions don’t just warrant a single rate cut; he’s calling for additional 50 basis points of reductions throughout 2026.

The Market Is Already Pricing It In

The probability markets are speaking louder than any Fed official comment. CME Group’s FedWatch tool now shows an 88% implied probability of a 25-basis-point rate cut at the Fed’s December 10 meeting—a massive jump from the 63% probability just one month earlier. This shift in expectations is precisely why the U.S. Dollar Index slipped to 99.408 during Asian trading and has now declined for seven consecutive sessions, hitting two-week lows.

Global Currency Implications

The dollar’s weakness isn’t uniform across all pairs, and that’s where trading opportunities emerge. The Japanese yen has remained relatively flat against the greenback at 155.51 as market participants await potential Bank of Japan tightening signals—BoJ Governor Kazuo Ueda hinted at weighing “pros and cons” of a rate hike, pushing Japanese two-year yields above 1% for the first time since 2008.

Meanwhile, the euro held steady around $1.1610 in early Asian trading, with geopolitical developments in Ukraine providing some support. The British pound continues to consolidate near monthly highs around $1.3216, buoyed by recent political developments. Both the Australian dollar ($0.6544) and New Zealand kiwi ($0.5727) are showing minimal movement as traders await clearer signals on Fed intentions.

The Bigger Picture

Why is the dollar weakening? Because interest rate differentials—the backbone of currency valuations—are compressing. When the U.S. looks set to cut rates while growth data deteriorates, foreign investors find less reason to hold greenbacks. The U.S. 10-year Treasury yield did briefly spike to 4.086% following broader bond market selloffs, but this doesn’t alter the fundamental outlook.

The manufacturing contraction, combined with the Fed’s apparent readiness to act in December, has shifted the narrative. Dollar bears now have concrete evidence to support their thesis, and the probability markets are reflecting that conviction. For traders and investors, the message is clear: don’t expect the dollar to find solid support until either economic data stabilizes or the Fed’s rate-cut cycle becomes more apparent.