USD Slides as Fed Cuts Loom; Korea & RBI Intervene

USD Slides as Fed Cuts Loom; Korea & RBI Intervene

Over the past week the US dollar weakened sharply as traders priced in an increasingly dovish Federal Reserve in 2026 while several major central banks and sovereign institutions took explicit steps to defend local currencies. The combination of shifting rate expectations, US liquidity operations and targeted FX interventions in Asia produced measurable moves across key pairs: USD/KRW, USD/INR and USD/CAD among them. This article dissects the concrete drivers, summarizes the key data, and outlines practical implications for FX traders and corporate treasury teams.

What pushed the dollar lower this week

Fed rate-cut odds and added liquidity

Across December 22–24, market pricing intensified around multiple Federal Reserve rate reductions in 2026. That shift in the interest-rate outlook compressed the interest-rate differential that had supported the dollar for much of the year. In parallel, the Fed announced regular Treasury bill purchases to bolster liquidity—about $40 billion per month—further easing term premium tensions in USD funding. Together, these two factors contributed to the US Dollar Index (DXY) slipping toward monthly lows and the currency finishing the year on track for its largest annual drop since 2003.

Strong US GDP but persistent inflation indicators

U.S. third‑quarter GDP surprised to the upside, clocking roughly a 4.3% annualized gain, yet core inflation gauges—most notably PCE readings—remained elevated. That divergence created a nuanced backdrop: growth strength typically supports currency demand, but higher inflation with an easing Fed outlook reduced the dollar’s carry appeal. Traders preferred to prioritize the policy trajectory over cyclical growth for now; the net effect was downward pressure on USD levels.

Technical signal: a possible short-term interruption

Technically, the ICE Dollar Index showed a “golden cross” when the 50‑day moving average approached or crossed the 200‑day average. Historically this setup can presage a countertrend bounce over several weeks. For tactical traders, that signal suggests the dollar could stage a short-lived rebound inside an otherwise weakening structural picture—useful for timing short-term entry and exits.

Central-bank and policy interventions that mattered

South Korea: hedging, tax incentives and spillovers to USD/KRW

South Korea’s National Pension Service initiated a significant FX hedging program late in the week, and Seoul introduced tax incentives that encourage repatriation of overseas investment. Those combined measures sparked a notable rally in the won—lifting USD/KRW from its earlier weakness and exposing how targeted sovereign actions can blunt dollar demand. The move was not speculative: it was a tactical policy response aimed at stabilizing FX flows ahead of year‑end.

India: RBI’s $10 billion buy‑sell swap reshaped forward pricing

The Reserve Bank of India rolled out a three‑year, $10 billion USD/INR buy‑sell swap that immediately compressed forward premiums. January forward points and longer-term forward premia dropped significantly, indicating lower hedging costs for corporates and reducing speculative demand for dollars in forward markets. The spot rupee remained relatively stable as the swap eased end‑of‑year funding pressures.

Canada: commodity support and yield convergence

Commodity price strength, notably in oil, along with a narrowing of Canada–US yield spreads, pushed the Canadian dollar toward a five‑month high versus the USD. USD/CAD traded around the mid‑1.36s during the week, reflecting both cyclical terms‑of‑trade support and relative policy expectations.

Practical takeaways for traders and corporate FX managers

• Prioritize central-bank communications: when policy paths diverge—especially a hawkish abroad vs. dovish Fed—the USD can lose structural support even if growth data are resilient.
• Use technical triggers for tactical trades: the golden cross may present a short-term buying opportunity, but it should be sized against macro risk that favors dollar depreciation.
• Watch intervention mechanics: Korea’s hedging program and India’s USD/INR swap directly reduced dollar demand in their pairs. Hedging desks should re‑price forward curves and option skew accordingly.
• Manage funding exposure: Fed T‑bill purchases ease short-term USD liquidity stress but can compress carry; cross‑currency basis and swap spreads remain key inputs for hedging costs.

Conclusion

This week’s price action was driven by concrete policy moves and evolving interest‑rate expectations rather than speculation. The USD’s descent reflects a consensus shift toward Fed easing in 2026, reinforced by the Fed’s liquidity support program. Meanwhile, targeted interventions—from Korea’s hedging and tax measures to the RBI’s swap facility—have reshaped demand and forward pricing in their respective pairs, producing discernible currency gains outside the United States. For traders and FX managers, the immediate priority is to align tactical positions with both the macro policy trajectory and pair‑specific central‑bank operations, rather than relying on broad directional assumptions.

End of report.