The U.S. dollar advanced for a second straight session as currency traders reassessed expectations for Federal Reserve rate cuts, dialing back projections that policymakers will deliver three reductions in 2026.

The move comes amid resilient U.S. economic data, particularly in inflation and labor markets, that has complicated the case for aggressive easing.

Fed Cut Bets Under Scrutiny

Money markets currently price about 64 basis points of rate cuts by year-end. However, several strategists argue those expectations may be overly optimistic given inflation remains above the Fed’s 2% target and economic growth has held firm.

A stronger-than-expected January jobs report further weakened the argument for early “insurance” cuts. Some analysts now forecast rate reductions beginning in June and September, followed by a prolonged pause.

If the Federal Reserve keeps borrowing costs elevated for longer, the dollar could see additional support from a repricing of expectations.

Positioning Shifts in FX Markets

The Bloomberg Dollar Spot Index posted modest gains in London trading, marking a temporary recovery after months of pressure.

According to recent surveys, investors’ exposure to the greenback is at its lowest level since at least 2012. That underweight positioning leaves room for a rebound if economic data forces markets to rethink the pace and scale of Fed easing.

Hedge funds reportedly trimmed bearish bets against the dollar earlier this week. Meanwhile, options markets show that short-term downside protection demand has eased, with front-end risk reversals becoming less negative.

Longer-Term Dollar Pressures Remain

Despite the recent bounce, the dollar has weakened roughly 10% since early 2025. Policy uncertainty, including trade tensions and shifting fiscal priorities, has weighed on sentiment toward the currency.

The Bloomberg Dollar Spot Index hit a four-year low in late January, with options traders positioning for further declines before the recent reprieve.

With a lighter economic calendar and U.S. markets closed for Presidents’ Day earlier in the week, traders used the opportunity to rebalance positions.

What Could Drive the Next Move?

According to investor surveys, the primary catalyst for renewed dollar strength would be economic data strong enough to force markets to scale back rate-cut expectations further.

Conversely, any evidence of cooling inflation or weakening growth could quickly revive bets on deeper easing — putting renewed pressure on the currency.

For now, the greenback’s rebound reflects not renewed bullish conviction, but rather a recalibration of expectations around the Federal Reserve’s path.

Confidential advisory: This article is for informational purposes only and does not constitute financial advice. Investors should conduct independent research before making currency or investment decisions.