US Dollar Declines as Euro and Pound Rise
The US dollar appears set for a third consecutive week of losses, as the euro and pound reached their highest values since October. This shift follows the Federal Reserve’s latest actions, which contradicted market expectations for rate cuts in the coming year.
Recently, the pound trading at $1.1738 saw a rise of 0.37% in the last session. It’s notable that it maintained a rate of $1.3395. Both the euro and pound are anticipated to continue their upward trend as the dollar remains under pressure.
This week, the Fed did cut interest rates as anticipated, but remarks from Chairman Jerome Powell were viewed by investors as more dovish than expected, leading to a sell-off of the dollar.
Christina Clifton, senior currency strategist at the Commonwealth Bank of Australia, noted, “We think worries regarding the US labor market might lead the Federal Open Market Committee to lower rates more next year. Our expectation is for three cuts in 2026, dropping the target rate to between 2.75% and 3%.”
There’s a notable uncertainty among investors regarding future US monetary policy. With inflation and labor market strength still ambiguous, policymakers expect just one rate cut next year and another in 2027. Traders, however, are pricing in two cuts in 2026.
Kieran Williams, from InTouch Capital Markets, expressed that the market has solid reasons to question the Fed’s long-term high interest rate projections. Historical trends suggest that the Fed may be more reactive to two-year Treasury yields than previously assumed.
He added, “If economic growth data continues to decline, the Fed may need to adopt a more dovish outlook, further impacting the dollar.”
The future trajectory of monetary policy hinges on upcoming economic data, which still feels the aftereffects of the 43-day federal government shutdown from October and November. As the US gears up for a midterm election year, economic performance will likely be under intense scrutiny, especially with Donald Trump pushing for even steeper rate cuts.
Market watchers are also focused on who will be the next Fed chair and how that might shape concerns regarding the central bank’s independence, issues that have become more prominent during the Trump administration.
The dollar index, which evaluates the US currency against six major rivals, stood at 98.36 and is expected to decline by 0.7% this week. The index has dropped more than 9% this year, marking the steepest annual decline since 2017.
In the meantime, the US dollar against the Japanese yen was slightly lower at 155.76 ahead of next week’s Bank of Japan meeting, where anticipated interest rate hikes will be in focus. Analysts will be keenly observing the central bank’s commentary regarding Japan’s own interest rate plans for 2026.
Elsewhere, the Swiss franc showed strength, as the dollar rose to 0.7942 against the currency during Asian trading hours. The outlook for Swiss exports appears to be improving, even amid slightly lower-than-forecast inflation.
Moreover, emerging market currencies are also benefiting from the weaker dollar, with the Malaysian ringgit strengthening. Sales are on track to hit a peak not seen in four years.
