Friday’s trading reflected a mix of stabilization and lingering caution. The dollar index inched up 0.1% to 98.44, recovering slightly from a two-month low hit the previous day. Even with this uptick, the index is down 0.6% for the week and 1.1% so far this month. Its broader trajectory also points to a challenging year: the index has fallen more than 9% in 2025, setting up what could be its steepest annual decline since 2017.
Market strategists attribute part of the currency’s softness to shifting expectations around U.S. monetary policy. Bob Savage, head of markets macro strategy at BNY, noted that the dollar’s month-long drift lower has been driven partly by the Fed’s recent rate cut and by investor fatigue after weeks of repricing interest-rate expectations.
Yen and Euro Hold Ground Ahead of Key Central Bank Signals
Against the yen, the dollar edged 0.2% higher to 155.93 as traders looked ahead to next week’s Bank of Japan meeting. While a rate hike is widely expected, markets are most focused on what policymakers signal about the pace of tightening through 2026. Reporting from Reuters suggests the BoJ is likely to reiterate its intention to keep raising rates while emphasizing that future steps will be guided by the economy’s response.
The euro, meanwhile, held steady at $1.1735 after touching a two-month high on Thursday. Both the euro and sterling are poised for a third straight week of gains against the dollar.
Sterling Softens as UK Data Undershoots Expectations
In the UK, sterling slipped 0.2% to $1.3375 following data showing the economy contracted by 0.1% between August and October—an unexpected deterioration after forecasts for flat growth. The latest figures have deepened expectations that the Bank of England will cut rates at its upcoming meeting, a move that markets had already priced in heavily.
Fed Messaging Leaves Investors Guessing About 2026
The Federal Reserve’s rate cut this week landed with a generally neutral tone, and Chair Jerome Powell’s comments were interpreted as less hawkish than some investors anticipated. While policymakers remain divided—evidenced by dissenting votes—analysts caution against reading the move as a signal of imminent tightening later on.
BNY’s Savage argued that it would be inaccurate to frame the Fed’s approach as aligning with the more hawkish stances emerging from the European Central Bank or the Reserve Bank of Australia.
Douglas Porter, chief economist at BMO, wrote that the dollar index has already slipped about 7% from its January peak and could weaken another 2–3% in 2026 if the Fed continues easing while other central banks head in the opposite direction.
Market pricing currently reflects expectations for two rate cuts next year, though Fed projections point to only one cut in both 2026 and 2027. Some Fed officials who opposed the recent easing reiterated concerns Friday that inflation remains insufficiently contained—especially given delays in official data tied to the October–November federal government shutdown.
This uncertainty comes as the U.S. nears a midterm election year. Economic performance is set to dominate political debate, with President Donald Trump advocating for more aggressive reductions in borrowing costs. Investors are also watching closely for signals about who will lead the Fed next and what that may mean for the central bank’s independence.
Swiss Franc Steadies After Policy Hold
Elsewhere in currency markets, the Swiss franc held at 0.7951 per dollar after reaching a near one-month high the day before. The Swiss National Bank kept its policy rate at 0%, citing an improved economic outlook following a recent agreement to reduce U.S. tariffs on Swiss goods—even as domestic inflation has undershot expectations.