The U.S. dollar was on course for its third consecutive weekly decline on Friday, weighed down by expectations of further interest rate cuts next year after the Federal Reserve pushed back against hawkish market assumptions. The softer Fed tone helped lift the euro and the pound to their strongest levels since October.
The euro last traded at $1.1738 after gaining 0.37% in the previous session, while sterling strengthened to $1.3395. Both currencies are set to post a third straight week of gains as broad dollar weakness persists.
The Federal Reserve lowered interest rates as widely expected this week, but comments from Chair Jerome Powell and the accompanying policy statement were seen by investors as less hawkish than anticipated. This interpretation added to selling pressure on the dollar.
Kristina Clifton, senior currency strategist at Commonwealth Bank of Australia, said concerns about the U.S. labour market are likely to push the Federal Open Market Committee toward additional easing next year. She expects three rate cuts in 2026, which would bring the federal funds rate into a 2.75% to 3.0% range.
Uncertainty over the direction of U.S. monetary policy remains high as inflation trends and labour market resilience are still unclear. Traders are currently pricing in two rate cuts in 2026, a more dovish view than policymakers’ projections, which point to one cut next year and another in 2027.
Kieran Williams, head of Asia FX at InTouch Capital Markets, said markets have reason to question the Fed’s “higher-for-longer” outlook. He noted that historical data suggests the central bank tends to follow movements in the two-year U.S. Treasury yield rather than lead them.
Williams added that if economic growth data continues to soften, the Fed may be forced to align more closely with the market’s dovish expectations, potentially putting further pressure on the dollar.
The outlook for U.S. policy is further complicated by economic data distortions following the 43-day federal government shutdown in October and November. This comes as the U.S. approaches a midterm election year, with economic performance likely to be a central theme and President Donald Trump calling for more aggressive rate cuts.
Markets are also watching closely for clues on who could become the next Federal Reserve chair and how that decision might affect concerns over the central bank’s independence under Trump.
The U.S. Dollar Index, which tracks the greenback against six major currencies, stood at 98.36 and was on track for a weekly loss of around 0.7%. The index is down more than 9% this year, heading for its steepest annual decline since 2017.
In Asia, the Japanese yen weakened slightly to 155.76 per dollar ahead of next week’s Bank of Japan policy meeting, where expectations are building for a rate hike. Investors are focused on guidance from officials regarding the policy outlook for 2026.
The Australian dollar was steady at $0.6667, while the New Zealand dollar rose 0.14% to $0.5815, supported by diverging interest rate expectations as domestic rates are seen rising even as U.S. rates trend lower.
Elsewhere, the Swiss franc strengthened to 0.7942 per dollar during Asian trading after a strong overnight session. The Swiss National Bank left its policy rate unchanged at 0% on Thursday and said a recent agreement to reduce U.S. tariffs on Swiss goods had improved the economic outlook, despite inflation running slightly below expectations.
Dollar weakness also supported emerging market currencies, with the Malaysian ringgit climbing to a four-year high.
