Treasury yields were mostly flat heading into the decision, with the 10-year holding near 4.178% and the 2-year near 3.602% . Steady yields limited support for the dollar early in the session, but traders expect rates to move once Powell clarifies how high the bar is for additional policy adjustment.
Fed Communication Sets the Dollar’s Path
Markets have assigned roughly a 90% probability of today’s cut, but the split inside the FOMC leaves room for volatility . Some members want to cushion a softening labor market—October hiring fell by 218,000 while layoffs rose by 73,000—yet inflation remains firm at 2.8% .
For FX markets, that tension raises the appeal of the term “hawkish cut”: a reduction accompanied by explicit messaging that further easing is unlikely soon.
A more cautious Powell would generally support the dollar by reinforcing the idea that U.S. real yields will not compress quickly. Conversely, any sign of comfort toward additional 2026 easing—investors currently expect two to four cuts—could undercut the greenback as rate differentials narrow.
Foreign Currencies React to Fed Rate Expectations
Cross-currency flows remain tied to whether the Fed signals a prolonged pause. A firm stance typically pressures higher-beta currencies and supports the dollar as investors rotate toward yield stability. But if Powell sounds more flexible, FX flows could shift back toward risk-sensitive pairs, weighing on the index.
Yields and Risk Sentiment Keep Dollar Traders Cautious
Equity markets remain resilient into December, which tempers haven demand for the dollar. Still, options markets reflect elevated uncertainty, with expected wide swings tied to the policy statement and Powell’s press conference .
