The U.S. dollar continued it’s downward trend Thursday, hitting a five-week low as markets widely anticipate an interest rate cut by the Federal Reserve next week following a series of weaker-than-expected economic indicators. The anticipated monetary policy shift is bolstering other currencies,including the Japanese yen and Euro,while also prompting speculation regarding the future leadership of the fed and potential impacts on U.S. economic policy. Investors are particularly focused on the possible appointment of Kevin Hassett as the next Federal Reserve chair and the implications of his known views on interest rates.
The U.S. dollar hovered near a five-week low on Thursday as weak American economic data fueled expectations that the Federal Reserve will cut interest rates next week, bolstering the Japanese yen and pushing the euro to a nearly seven-week high.
Investors are also closely watching the possibility of White House economic advisor Kevin Hassett taking the helm at the Federal Reserve when Jerome Powell’s term ends in May. Hassett is widely expected to advocate for further interest rate reductions, adding to the downward pressure on the dollar.
President Donald Trump indicated this week that he will reveal his nominee to succeed Powell early in the new year, extending a selection process that has been ongoing for months, despite previously claiming a decision had already been made.
Analysts suggest that Hassett’s appointment could increase pressure on the dollar, as bond investors fear a sharp rate cut aligned with Trump’s preferences. This concern comes as the dollar has already been trending downward for much of the year.
Data from LSEG shows traders are currently pricing in an 85% probability of a quarter-point interest rate cut by the Federal Reserve next week. The market is keenly focused on the potential shift in monetary policy.
“A rate cut by the Fed next week is already priced in,” noted Commerzbank currency analysts Tu Lan Nguyen and Antje Praefcke in a recent memo. “What will be crucial for the dollar is whether there are any new hints regarding the direction of monetary policy at subsequent meetings.”
The Dollar Index, which measures the currency’s performance against six major rivals, stabilized at 98.94 after nine consecutive days of decline. It remained near its five-week low and is down nearly 9% since the start of the year, reflecting broader market sentiment.
A Reuters poll revealed that a significant minority of currency strategists anticipate a stronger dollar in the coming year, although most maintain expectations of a weaker currency in 2026, driven by bets on further interest rate cuts.
Thomas Matthews, head of markets for Asia Pacific at Capital Economics, suggested that investors may be overestimating the extent of future rate cuts by the Fed, given the strength of the U.S. economy. “That could limit the dollar’s downside,” he said.
The euro edged down 0.1% to $1.1657 but remained close to its highest level since October 17, reached in the previous session, following data indicating the fastest growth in Eurozone business activity in 30 months.
The European currency has gained over 12% since the beginning of the year, on track for its largest annual increase since 2017, benefiting from a weaker dollar due to earlier trade tensions and, more recently, rising expectations of U.S. interest rate reductions.
The European Central Bank is scheduled to meet in two weeks and is expected to hold interest rates steady, with markets pricing in only a 25% probability of a cut at some point next year.
The yen remained stable at 155.22 against the dollar, slightly higher than its ten-month low reached last month, as concerns resurfaced about potential intervention by Japanese authorities. Three government sources familiar with the discussions told Reuters that the Bank of Japan may raise interest rates in December, although the outlook beyond that remains uncertain.
“The Bank of Japan’s continued caution, the attractive yield on dollar/yen carry trades, and ongoing pressure on Japanese government bond yields due to potential fiscal expansion are all factors that could keep pressure on the yen’s weakness,” said Chidu Narayanan, head of macro strategy for Asia Pacific at Wells Fargo.
The British pound traded at $1.3337, near its highest level since October 28. Meanwhile, the Swedish krona declined against the euro and the dollar following a slowdown in the annual inflation rate in November.
The Chinese yuan weakened slightly but remained near a 14-month high, after the People’s Bank of China set a weaker-than-expected daily reference rate for the sixth consecutive day, signaling caution about the currency’s rapid appreciation.
Despite headwinds from the trade war, slower growth, low interest rates, and declining foreign investment, the yuan is poised for its best annual performance since the 2020 pandemic.
