The US dollar has recorded its most significant weekly decline since June, as financial markets enter a holiday-thinned trading period with a sharp focus on upcoming economic data that will shape the Federal Reserve's monetary policy path into 2026.
Holiday Trading and a Weakening Greenback
With subdued activity due to holidays and the UK market closed on Friday, the Bloomberg Dollar Spot Index held steady at the end of the session but registered a weekly loss of approximately 0.8%. This marks its poorest weekly performance in six months. For the entire year, the index has shed roughly 8%, positioning it for the most severe annual drop since 2017.
"Liquidity was thin this week, and that didn't help the dollar, which was already in a relatively weak position," noted Andrew Hazlett, a foreign-exchange trader at Monex Inc. The dollar's weakness allowed risk-sensitive currencies like the Australian dollar and the Norwegian krone to lead gains among major peers.
All Eyes on January's Economic Calendar
Investor attention has now decisively shifted to major US economic reports scheduled for release in the first few weeks of January. The December jobs report and the latest consumer inflation readings are considered critical for charting the Federal Reserve's subsequent steps.
This scrutiny follows the Fed's decision this month to reduce borrowing costs for the third consecutive meeting, a move aimed at supporting economic growth. Recent data has fueled expectations for a continued dovish stance: US unemployment rose to its highest level since 2021, while consumer inflation figures came in lower than analysts had anticipated.
The dollar's decline has moved in tandem with a dip in Treasury yields. The yield on the benchmark US 10-year note fell about two basis points this week to 4.13%, staying within its recent range.
Market Bets on Future Fed Policy Moves
Current market pricing indicates traders see about a 90% probability that the Fed will hold rates steady at its next meeting. However, expectations are building for further easing later in the year. The consensus among traders points to another quarter-point cut by mid-2025, followed by an additional reduction several months later, extending into 2026.
This outlook has led to a sustained bearish sentiment on the US currency. Traders have bolstered expectations for a weaker dollar for five consecutive days, with a key options gauge reflecting the most pessimistic view on the greenback in over three months.
"Looking ahead, our focus is going to be on inflation numbers as guidance for the Fed's next cut," added Hazlett, summarizing the market's wait-and-see approach as the new year begins.
