Why the Dollar Crashed: Fed's Softer Stance Shifts Everything

Thursday’s trading session delivered a stark reminder: central bank messaging matters more than the actual rate move. The U.S. dollar plunged to multi-month lows, not because the Federal Reserve cut rates by 25 basis points—that was expected—but because Powell signaled room for more cuts ahead. This softer monetary policy stance caught markets off guard and triggered a dollar selloff across major currency pairs.

The Numbers Tell the Story

Initial jobless claims jumped 44,000 last week, reaching 236,000 for the week ending December 6—the largest weekly increase in nearly four-and-a-half years. This labor market deterioration painted a picture of economic softness, supporting the case for continued monetary easing rather than tightening. The data hit markets like a gut punch, accelerating the dollar’s decline.

Against the euro, the greenback dropped 0.4% to $1.1740, while sterling held steady at $1.3387 after touching two-month highs. The dollar’s weakest showing came against the Swiss franc, slipping 0.6% to 0.7947—its lowest level since mid-November. The yen also gained ground, pushing USD/JPY down 0.3% to 155.61.

What Changed the Game

The market had entered the Fed meeting expecting hawkish guidance. Instead, Powell adopted a notably cautious stance, hinting at flexibility on future rate cuts. As UBS strategist Vassili Serebriakov explained: “Although Powell wasn’t overtly dovish, he indicated the possibility for additional cuts.” This dovish turn contrasted sharply with emerging tightening signals from other G10 central banks—the ECB and Australia’s RBA both leaned toward hiking, not cutting.

Adding fuel to the dollar fire, the Federal Reserve announced it would purchase $40 billion in short-dated government bonds beginning December 12, with another $15 billion reinvested in T-bills. This $55 billion liquidity injection favored risk-on trades and weighed on safe-haven currencies like the dollar.

Winners and Losers

The Swiss franc strengthened after the Swiss National Bank maintained its 0% policy rate, with SNB Chairman Martin Schlegel noting that tariff relief on Swiss goods improved the economic outlook. Interestingly, despite inflation undershooting targets, Schlegel ruled out negative rates—a hawkish threshold that supported the franc.

The Australian dollar stumbled 0.2% to $0.6663 after employment plunged by the largest margin in nine months, suggesting regional economic headwinds. In risk assets, Bitcoin dipped below $90,000, stabilizing at $91,008 (down 1.5%), while Ether fell more than 4% to $3,200.

The Bigger Picture

The dollar’s recent trajectory reflects a fundamental shift in global monetary policy expectations. The Fed’s softer stance, combined with labor market softness and aggressive liquidity injections, has tilted the playing field away from dollar strength and toward riskier assets. Until the economic data improves significantly or the Fed reverses course, the greenback faces headwinds.