Currency Winners and Losers of The Fed's Big Liquidity Injection

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The Federal Reserve is injecting significant liquidity into the banking system, and this will dominate market trends in the coming weeks.

Sentiment is set to be the overarching theme into year-end, and it's worth understanding who the winning and losing currencies will be under this setup.

Stocks are rising as confidence grows that the Federal Reserve is going to make everyone's life a lot easier by cutting interest rates next week.

💬 "The resilience of risk assets is becoming impossible to ignore, most notably underscored by the S&P 500's seven-month winning streak, a milestone achieved only sixteen times since World War II," says Antonio Ruggiero, analyst at Convera.

💲 The Real Big Story

But, perhaps, far more important than a mere 25 basis point rate cut, and it's likely to be the big story that is receiving very little attention, is that the Fed is already actively working away to turn up the mood music.

🏦 The Fed has officially ended its latest cycle of Quantitative Tightening (QT) as of 1 December 2025, which would traditionally dry liquidity from the system as the Fed stops exchanging bonds for reserves as it runs down its bloated post-crisis holdings of government bonds

But it's also injecting $13.5BN via overnight repos into the banking system, meaning it is actively no longer draining liquidity, reversing the prior trend. That’s significant because this is reportedly the second-largest such injection since the COVID-19 crisis.

In plain terms: the Fed is telling banks, "we won’t keep draining cash from the system, in fact, here’s more cash now."

💬 Ruggiero says the S&P's remarkable rally is being fueled by a distinct shift in liquidity dynamics at the Fed.

"This operation, the second largest since the pandemic and surpassing peaks seen during the Dot-Com bubble, suggests that the financial 'plumbing' is now primed to support further risk-taking," he says.

🔥 The Currency Winners and Losers to Watch Out For

The liquidity injection is supportive of investor risk-taking and presents the prospect of fresh advances by global equity markets.

For currencies, there's a relatively simple rule of thumb in that those with a high beta to equity movements will benefit, i.e. those currencies that have a strong correlation with global sentiment.

Those currencies seen as a safe harbour during market setbacks are likely to come under pressure.

📈 These are the higher-beta, in descending order of strength, pro-cyclical or commodity-linked currencies that usually strengthen when global risk appetite improves:

1.  AUD - Australian dollar
   High-beta, commodity-linked, strongly correlated with global growth and equity sentiment.
2.  NZD - New Zealand dollar
   Very similar risk profile to AUD, tends to outperform when markets turn optimistic.
3.  NOK - Norwegian krone
   High-beta and heavily oil-linked; one of the most sensitive currencies to risk sentiment.
4. CAD - Canadian dollar
   Commodity-linked and tends to appreciate when equities and global demand rise.
5. SEK - Swedish krona
   A higher-beta European currency; often behaves pro-cyclically and benefits from improved global sentiment.
6. GBP - British pound
   Moderate beneficiary. Not a pure high-beta currency, but usually strengthens when USD and JPY weaken in risk-on phases.
7. 7. EUR - Euro
   Mild beneficiary. Not high-beta, but tends to rise when USD softens in broad risk-on conditions.

🇬🇧 🔁 🇪🇺  (GBP/EUR tends to benefit on account of GBP being higher in the 'risk-on' hierarchy.

📉 G10 currencies that typically do not benefit (or underperform) in a risk-on setup

These are the classic safe havens that tend to weaken when investors rotate out of defensive assets:

1.  JPY - Japanese yen
   Pure safe-haven; usually weakens when global risk sentiment improves.
2. CHF - Swiss franc
   Another classic safe-haven; underperforms when markets move into risk-taking mode.
3.  USD - US dollar
   Not a traditional safe-haven in the same way as JPY & CHF, but the USD usually underperforms in broad risk-on phases as capital rotates to higher-yielding currencies.