Dollar Faces Sharp Weekly Decline as Markets Brace for Fed Easing

The U.S. dollar drifted toward its weakest weekly performance since late July as traders increased bets on further monetary easing from the Federal Reserve at its December 10 meeting. Although the dollar index inched up 0.1% to 99.624 on Friday, the slight rebound followed five straight sessions of losses that pushed the gauge to its steepest weekly drop in four months.

Market expectations for a Fed rate cut surged sharply over the past week. According to the CME FedWatch tool, futures now reflect an implied 87% probability of a 25-basis-point reduction in December, jumping from just 39% a week earlier. U.S. Treasury yields echoed the shift in sentiment, with the 10-year yield ticking up 0.8 basis point to 4.0037% after sliding for five consecutive days and briefly dipping below the 4% mark twice.

In Asia, the Japanese yen hovered between gains and losses, last trading 0.1% weaker at 156.385 per dollar. Stronger labor market and inflation data reinforced expectations of near-term monetary tightening in Japan, even as persistent yen weakness keeps intervention risks elevated. Tokyo consumer prices rose 2.8% in November, surpassing economists’ forecasts and remaining above the Bank of Japan’s 2% target. Analysts at Capital Economics noted that with core inflation expected to remain above 3%, the BOJ is likely to resume tightening in the coming months.

The yen remains on course for a third monthly decline as Prime Minister Sanae Takaichi pursues a 21.3 trillion yen ($135.4 billion) stimulus plan while the BOJ maintains its cautious stance on rate hikes.

Elsewhere, major currencies held steady. The euro traded around $1.1600 following comments from Ukraine’s President Volodymyr Zelenskiy about ongoing talks with the U.S. on a security framework to end the war with Russia. Sterling slipped 0.1% to $1.323 but is still heading for its strongest weekly performance since early August after U.K. finance minister Rachel Reeves announced £26 billion in tax increases to support welfare spending.

The Australian dollar rose to $0.6536 after private sector credit grew 0.7% in October, while the offshore yuan held firm at 7.074 per dollar, on track for its best month since August. The New Zealand dollar traded at $0.5725, easing slightly after its biggest weekly jump since late April.