US Dollar Stays Strong Despite Weak CPI Data – What Markets Are Really Pricing In

The US Dollar is holding up better than expected after yesterday's softer-than-anticipated November Consumer Price Index release. While the weak inflation data might have triggered a stronger currency sell-off, markets seem skeptical about how much it actually changes the big picture. Two-year Treasury yields barely budged, staying flat over the day's session.

Yet beneath the surface, traders are still pricing in Federal Reserve rate cuts for 2026. According to analysis from ING's FX team, the market consensus points to approximately 25 basis points of cuts by April, with another 25bp expected by September. The question remains whether this outlook holds as new data rolls in.

Treasury Flows Tell a Complicated Story

October's Treasury International Capital (TIC) data reveals some notable shifts in how foreign investors are positioning themselves. The headline number: just $17.5 billion in net purchases of long-term US securities – the weakest performance since April's $24 billion outflow. These flows are notoriously erratic month-to-month, so drawing firm conclusions is risky. Yet one consistent pattern stands out.

The BRICS nations continue reducing their Treasury allocations. October saw significant declines: China pulled out $11.8 billion, India reduced holdings by $12 billion, and Brazil cut $5 billion from its position. Among foreign official institutions overall, Treasury bonds and notes fell by $22 billion, though this was partially cushioned by a $14 billion rise in short-term T-bill purchases through ING securities channels and other venues.

ING analysts suggest India's retreat likely stems from supporting the rupee through FX intervention, while geopolitical considerations may also be at play. The broader takeaway: foreign official sector demand is cooling.

Private Investors Are the Real Story

Here's where it gets interesting. Despite official sector caution, private investors continue stepping in to buy Treasuries. This behavior supports ING's forecast for a weaker dollar in 2026, with the thesis hinging on foreign private investors increasing their hedge ratios on US assets rather than abandoning them entirely. It's a rebalancing, not a flight.

What's Next for the Dollar Index?

The yen offers a near-term focal point. Recent weakness in USD/JPY has given the Dollar Index (DXY) some upside support. Bank of Japan Governor's recent comments signal the central bank needs more time to assess the impact of its rate hike before any further moves – potentially 6 to 12 months of patience. This stance keeps the yen under pressure and supports the dollar.

For the Dollar Index itself, technical resistance sits at the 98.75 to 98.80 range. Breaking above this zone could signal fresh strength, though the longer-term narrative – a gradual dollar decline in 2026 – remains the working hypothesis among major market participants.