Dollar Stays Strong as Markets Price in Modest Fed Cuts – What DXY Traders Need to Know

The US Dollar is holding its ground despite yesterday’s surprisingly weak November inflation data. Counterintuitively, the softer-than-expected CPI reading didn’t spark the major currency reaction many anticipated – two-year Treasury yields barely budged. Market participants appear cautious, perhaps questioning whether the numbers truly reflect underlying economic conditions.

Fed Rate Cuts Still in the Cards for 2026

The silver lining for rate-cut expectations remains intact. Financial markets are currently pricing in approximately two Federal Reserve cuts over the coming year: one anticipated by April 2026 and another by September. This outlook continues to support the broader narrative around monetary easing, even as the immediate dollar reaction to CPI data proved muted.

For DXY ETF investors and forex traders tracking the dollar index, this uncertainty presents a mixed picture. While the index briefly tested resistance near 98.75/80, the longer-term trajectory will likely depend on how Fed communication unfolds in coming weeks.

Treasury Inflows Tell a Complicated Story

October’s Treasury International Capital (TIC) data revealed net foreign purchases of long-term US securities at just $17.5bn – marking the lowest level since April’s $24bn outflow. While this figure creates headlines, it masks a more nuanced reality: the data is historically volatile and insufficient for drawing firm conclusions about capital rotation away from US markets.

The more telling trend concerns Treasury holdings among BRICS nations. China reduced holdings by $11.8bn, India by $12bn, and Brazil by $5bn during the month. Among the foreign official sector overall, Treasury bond and note holdings fell $22bn, though this was partially offset by a $14bn increase in short-term T-bill positions.

Analysts suspect India’s pullback relates to rupee support interventions, while geopolitical considerations may also be influencing allocation decisions across the region. Critically, private sector demand for US debt instruments remains robust, suggesting that foreign investment dynamics – rather than wholesale portfolio exits – will ultimately determine Treasury demand and, by extension, dollar strength trajectories.

Japanese Yen Weakness Keeps Dollar Bid

The Bank of Japan’s recent communication that it requires time to assess the impact of its latest rate hike before considering additional moves has created a supportive environment for USD/JPY. Officials indicated the review period could extend six to 12 months, providing substantial runway for yen weakness relative to the dollar.

This dynamic is currently underpinning broad dollar strength, keeping the DXY index resilient even as longer-term rate expectations suggest potential headwinds ahead.

Looking Ahead: The 2026 Dollar Outlook

Despite near-term resilience, the consensus view tilts toward a weaker dollar over 2026 as foreign investors adjust hedge ratios on US assets upward rather than exiting positions entirely. This recalibration, combined with anticipated Fed easing, could eventually challenge current dollar strength – making current levels potentially relevant for longer-duration positioning decisions across DXY ETF products and currency pairs.