Dollar Weakens Ahead of Expected Federal Reserve Rate Cut

The U.S. dollar hovered near a five-week low on Friday as global investors positioned themselves for a widely anticipated Federal Reserve rate cut next week. The greenback remained under pressure across major currencies, with the yen showing notable strength as expectations rise that the Bank of Japan may resume its rate-hike cycle later in December.

Markets are pricing in a quarter-point rate reduction when the Federal Open Market Committee meets on December 9–10, while traders also anticipate the possibility of two to three additional cuts in 2025, according to LSEG data. The dollar index slipped 0.2% to 98.929 as of 0623 GMT, moving closer to Thursday’s five-week low of 98.765 and setting up a weekly decline of about 0.6%.

The U.S. labor market remains central to the Fed’s decision-making. Initial jobless claims unexpectedly fell to a more than three-year low last week, although analysts caution the Thanksgiving holiday may have distorted the data. Key employment figures typically released in early December have been postponed to mid-month due to delays caused by the recent prolonged government shutdown, which also disrupted several economic reports.

In the absence of fresh jobs data, markets are turning their attention to one of the Fed’s preferred inflation indicators—the core PCE deflator—set for release Friday. Economists expect a modest 0.2% monthly rise in September’s reading, while some analysts, including those at Commonwealth Bank of Australia, see potential for an even softer 0.1% gain, which could further support the case for a rate cut.

Political developments have also weighed on the dollar, with speculation that White House economic adviser Kevin Hassett could succeed Jerome Powell as Fed Chair, raising expectations for a more dovish policy stance.

The dollar slipped 0.3% to 154.46 yen, its weakest level since November 17. Meanwhile, the euro edged up to $1.1659, and the British pound climbed to $1.33505. The Australian dollar advanced to a two-month high at $0.6626, while the Swiss franc strengthened to 0.8026 per dollar.

Global central banks are set for a busy stretch of policy decisions over the next two weeks, keeping currency markets on alert as investors assess the shifting monetary landscape.