The U.S. dollar edged slightly higher on Wednesday after touching its weakest level since early October, as soft labor market data left investors uncertain about the timing of the Federal Reserve’s next interest rate cut.
Recent employment figures pointed to ongoing weakness in the U.S. labor market, keeping markets cautious ahead of key inflation data that could provide further clarity on the Fed’s policy path.
Dollar steadies as markets await inflation data
The dollar index, which tracks the greenback against six major currencies, rose 0.18% to 98.394. Despite the modest rebound, the index remained close to Tuesday’s low, its weakest since October 3. The dollar index is down roughly 9.5% so far this year, putting it on course for its sharpest annual decline since 2017.
The euro slipped 0.14% to $1.173 but stayed near the 12-week high reached in the previous session. Traders are positioning ahead of the European Central Bank’s policy decision on Thursday, where interest rates are widely expected to remain unchanged.
Jobs data clouds Federal Reserve outlook
U.S. nonfarm payrolls rose by 64,000 in November, beating economists’ forecasts. However, the unemployment rate stood at 4.6%, with the data distorted by the impact of a 43-day government shutdown.
Analysts said the mixed report did little to shift expectations for Fed policy, with attention now turning to upcoming consumer price index data.
Kieran Williams, head of Asia FX at InTouch Capital Markets, said distortions in the jobs figures made them difficult for policymakers to act on in the near term. He added that clearer data in the first quarter would be needed to confirm the pace of economic deterioration, pointing to March or April as a more realistic window for any potential rate cuts.
The Federal Reserve cut rates last week as expected but signaled that further easing is unlikely in the near future, projecting only one additional rate cut in 2026. While markets are currently pricing in two cuts next year, expectations for a January move remain low.
Thomas Mathews, head of markets for Asia-Pacific at Capital Economics, said that if inflation data meets expectations, the Fed will face little pressure to ease policy in the coming months, with even March potentially too early for another cut.
Global central bank meetings take center stage
Attention is also turning to a busy week of central bank decisions. The European Central Bank is set to announce its policy decision on Thursday, while the Bank of England is expected to deliver a rate cut following a closely contested vote.
Sterling fell 0.25% to $1.3388, retreating from a two-month high after data showed U.K. unemployment rose to its highest level since early 2021. Private-sector wage growth also slowed to its weakest pace in nearly five years, reinforcing expectations of looser monetary policy.
The Japanese yen weakened to 155.145 per dollar ahead of the Bank of Japan’s policy meeting on Friday. Markets are focused on the central bank’s forward guidance and its outlook for interest rates in 2026.
Strategists at Bank of America said the BOJ may struggle to provide clear guidance on the terminal rate, adding that a sharp yen depreciation following the meeting could prompt policymakers to accelerate the timing of the next rate hike, potentially bringing it forward to April 2026.
Commodity-linked currencies mixed
Elsewhere, the Australian dollar slipped 0.23% to $0.6619, while the New Zealand dollar traded at $0.57755. The kiwi is on track for a gain of more than 3% this year, ending a four-year losing streak, while the Australian dollar is poised for a nearly 7% annual rise, its strongest performance since 2020.
