Dollar Under Siege: Manufacturing Slump and Labor Cracks Fuel Aggressive Rate Cut Bets

WikiFX

| 2026-01-06 17:50

Abstract：US manufacturing activity has contracted for the tenth consecutive month while unemployment ticks up to 4.6%, fueling Goldman Sachs' call for deeper Fed rate cuts despite lingering tariff-induced inflation concerns.

The US Dollar is facing renewed headwinds as a “stagflation-lite” narrative begins to grip the macro outlook. Fresh data reveals a deepening fissure in the US economy: the manufacturing sector remains in a persistent recession, while the labor market—the Federal Reserve's final stronghold—is showing unmistakable signs of fatigue.

ISM Manufacturing: A Decade of Contraction?

The ISM Manufacturing PMI for December dropped to 47.9, marking the 10th consecutive month below the boom-bust line of 50. The details of the report paint a grim picture for the industrial heartland:

New Orders: Contracting for four straight months, signaling weak future demand.

Inventory Burn: Manufacturers are depleting stock rather than producing new goods, a classic sign of defensive corporate positioning.

Cost Push: Despite weak demand, the Prices Paid index remains elevated at 58.5, complicating the inflation picture.

This divergence places the Fed in a bind. The administration's aggressive tariff policies (averaging nearly 17%) are keeping input costs high, but the underlying economy is losing momentum.

The 4.6% Unemployment Trigger

The most alarming signal for the Greenback comes from the labor market. The unemployment rate has ticked up to 4.6%, with broader measures of underemployment (U-6) rising to 8.7%. This deterioration challenges the “soft landing” narrative.

Goldman Sachs has issued a stark warning, projecting that the Federal Reserve may be forced to cut rates more aggressively than the market's current pricing. The reasoning is clear: labor demand is softening not due to a lack of supply, but due to a cooling of business confidence and hiring intentions.

Fed Rhetoric Shifts

Minneapolis Fed President Neel Kashkari recently noted that interest rates might already be near “neutral,” implying that current policy is not as restrictive as thought—or that the economy is weaker than believed. With the Fed Funds Rate facing pressure to realign with a cooling reality, the yield advantage that supported the USD throughout 2025 is eroding.

For Forex traders, the dynamic is shifting from “Buy the Dollar for Yield” to “Sell the Dollar on Growth Fears.” If upcoming NFP data confirms the trend towards 5% unemployment, expect the DXY to test lower support levels as the market prices in a full pivot to capital preservation.