Dollar-led decline extends to a third consecutive week as markets weigh the Fed outlook
A picture shows U.S. dollar notes, illustrating the currency landscape as of early November. (Reuters/Illustration)
Summary highlights
- The euro and pound gain as the dollar softens
- A less hawkish tone from the Federal Reserve fuels dollar selling
- Market expectations for rate cuts diverge from policymakers for next year
Singapore, Dec 12 — The U.S. dollar was set to finish its third straight weekly drop on Friday, pressured by expectations of rate cuts in the coming year after the Federal Reserve hinted at a softer stance than some market bets had priced in. This helped push the euro and the pound to their strongest levels since October.
The euro traded around $1.1738 after a 0.37% increase the previous session, while the British pound held near $1.3395. Both currencies appeared on track for a third consecutive week of gains as the dollar remained under pressure.
What shaped the moves this week was the Fed’s decision to cut rates as anticipated, but the accompanying guidance and Fed Chair Jerome Powell’s remarks were interpreted as less aggressive than some investors had expected. The result was continued momentum in selling the dollar.
Kristina Clifton, senior currency strategist at Commonwealth Bank of Australia, commented that concerns about the U.S. labor market are likely to push the Federal Open Market Committee toward further rate cuts next year. She expects three cuts in 2026, bringing the fed funds rate to about 2.75%–3.0%.
Looking ahead, traders remain uncertain about U.S. monetary policy next year as inflation trends and the strength of the labor market are still unclear. Market pricing shows roughly two rate cuts in 2026, whereas policymakers foresee just one cut in 2026 and another in 2027.
Kieran Williams, head of Asia FX at InTouch Capital Markets, noted that markets have a solid basis to doubt the Fed’s “higher-for-longer” dot plot, pointing out that the Fed has historically tracked the two-year Treasury yield rather than the other way around. If growth data softens further, the Fed may be compelled to align with the market’s more dovish pricing, potentially weighing more on the dollar.
The path of policy will hinge on data that remain lagging in the wake of the 43-day U.S. government shutdown in October and November. As the United States heads into a midterm-election year, economic performance is likely to be a central focus, with former President Donald Trump urging sharper rate reductions.
Markets are also watching who will lead the Federal Reserve next, and how a potential leadership change could influence concerns about the central bank’s independence under Trump.
The U.S. dollar index, which measures the greenback against six major rivals, hovered around 98.36, signaling a weekly decline of about 0.7%. The index has fallen more than 9% this year, marking its steepest annual drop since 2017.
The Japanese yen weakened slightly to around 155.76 per dollar ahead of next week’s Bank of Japan meeting, where a rate hike is broadly expected. Traders will scrutinize comments about Japan’s rate path for 2026.
The Australian dollar held at about $0.6667, while the New Zealand dollar inched higher to roughly $0.5815 as investors weigh divergent rate trajectories, with the next domestic rate moves likely to trend higher for Australia and New Zealand despite overall expectations of further declines.
In other news, the Swiss franc strengthened to about 0.7942 per U.S. dollar during Asian trading after a robust session overnight. The Swiss National Bank left rates at 0% and noted that a recent agreement to reduce U.S. tariffs on Swiss goods has improved the economic outlook, even as inflation has run somewhat below expectations.
The weaker dollar also supported emerging-market currencies, with the Malaysian ringgit touching a four-year high.
Reporting by Ankur Banerjee in Singapore; Editing by Shri Navaratnam and Jamie Freed
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