U.S. Dollar Weakened by Dismal Manufacturing Data; Rate Cut Expected This Month

Key Points Summary:

• The U.S. dollar faces downward pressure as disappointing manufacturing data raises expectations for interest rate cuts by the Federal Reserve.

• Manufacturing contracted for the ninth consecutive month, with the PMI falling to 48.2 in November, intensifying calls for further rate cuts.

• Market anticipation indicates a high probability of a rate cut during the Fed's upcoming meeting on December 10.

The U.S. dollar came under renewed pressure on Tuesday, following disappointing manufacturing activity data that heightened expectations for interest rate reductions by the Federal Reserve at its upcoming policy meeting. The U.S. Dollar Index, which tracks the greenback against a basket of six major currencies, slipped to 99.408 during the Asian trading session, continuing its decline for a seventh consecutive session and reaching a two-week low during Monday's U.S. trading hours amid a pullback in both stocks and bonds.

Recent data revealed that U.S. manufacturing contracted for the ninth straight month in November, with the Institute for Supply Management's manufacturing Purchasing Managers' Index (PMI) decreasing to 48.2, down from 48.7 in October. The decline in new orders and employment, coupled with rising input prices due to persistent import tariffs, suggests a deceleration in economic demand, according to Brian Martin, head of G3 economics at ANZ in London. Martin advocates for rate cuts not only in December but also anticipates an additional 50 basis points of reductions in 2026.

Fed funds futures now reflect an 88% implied probability of a 25-basis-point rate cut in the Fed's upcoming meeting on December 10, a notable increase from the 63% probability estimated a month prior, as indicated by the CME Group’s FedWatch tool. Meanwhile, the yield on the U.S. 10-year Treasury bond rose to 4.086% following a selloff in global bond markets on Monday.

In foreign exchange markets, the dollar traded at 155.51 yen against the Japanese currency, unchanged from late U.S. levels, as Bank of Japan Governor Kazuo Ueda indicated that the central bank would weigh the "pros and cons" of a potential rate hike at its next meeting. This comment led to Japanese two-year yields surpassing 1% for the first time since 2008.

The euro held steady at $1.1610 in Asia, as diplomatic efforts to negotiate an end to the war in Ukraine continued, garnering support for Ukrainian President Volodymyr Zelenskiy amidst evolving peace talks. The British pound was valued at $1.3216, remaining near its highest levels in a month, following the resignation of the head of Britain’s fiscal watchdog after the premature release of key government budgeting details. Additionally, the Australian dollar was stable at $0.6544, while the New Zealand kiwi dollar traded at $0.5727, both showing little movement at the start of the Asian session.