Dollar Slides as Cooling Inflation Fuels Rate-Cut Bets Ahead of Core PCE

Key Takeaways:

• Dollar extends losses as markets price in a more dovish Fed policy path into 2026

• U.S. inflation cools faster than expected, dragging Treasury yields lower

• Focus turns to Core PCE, the final key U.S. data release of 2025

Market Summary:

By the end of the Christmas week, the U.S. dollar has continued to extend its losses, as markets remain focused on increasingly dovish expectations for the Federal Reserves policy path into 2026. Although the dollar briefly climbed to a one-week high on Friday amid bargain buying, the rebound proved short-lived, with follow-through demand failing to materialize.

Support levels and bargain-hunting flows have repeatedly failed to stabilize the greenback, leaving the broader downtrend intact. As the U.S. government shutdown came to an end, a backlog of delayed economic data was released, but the figures largely disappointed investors and reinforced concerns over the underlying strength of the U.S. economy.

Cooling inflation has direct implications for the dollar through the interest-rate channel. When inflation moderates more rapidly than expected, markets tend to price in a greater scope for rate cuts, pushing U.S. bond yields lower and eroding the dollars yield advantage. Following the inflation release, the U.S. 10-year Treasury yield slipped to around 4.13%, while the dollar index fell toward the 98.2 area, highlighting the close link between yields and currency performance.

Adding to the pressure, the Federal Reserve delivered a 25-basis-point rate cut in December and reiterated that future policy decisions would remain fully data-dependent. This reinforced expectations that the tightening cycle is firmly over and that the next phase of policy will likely remain accommodative.

Looking ahead, market attention turns to the final major U.S. data release of 2025—the Core PCE Price Index—due later today. As the Feds preferred inflation gauge, the report is expected to play a key role in shaping near-term dollar direction, particularly in thin holiday trading conditions.