Market pricing indicates strong confidence in a quarter-point cut, with futures showing nearly a 90% probability, according to LSEG data. Traders are now focused on how the Fed will communicate its policy outlook beyond December.
“Traders are doubling down on bets the Fed will cut rates and stop short of delivering an overtly hawkish message at next week’s meeting,” said Karl Schamotta, chief market strategist at Corpay.
The dollar index rose 0.1% to 99.02, putting it on track to end a nine-day losing streak, though it remained close to Wednesday’s trough of 98.765. The index is down roughly 9% so far this year.
The euro slipped 0.2% to $1.1649 but held firm after data on Wednesday showed euro zone business activity expanding at its fastest pace in two and a half years.
U.S. labor market data—showing new jobless claims falling to a three-year low—did little to alter expectations for a Fed cut, with markets largely convinced that softer inflation remains the central bank’s main concern.
Adding another layer of uncertainty for currency markets, investors have been watching political developments in Washington. Reports that White House economic adviser Kevin Hassett is under consideration to replace Jerome Powell as Fed Chair have added pressure to the dollar, given expectations that Hassett would support more aggressive rate cuts. President Donald Trump has said he will announce his nominee early next year.
Analysts warn that such a shift at the Fed could unsettle bond markets. Some investors have raised concerns directly with the U.S. Treasury that a Hassett-led Fed may align more closely with the administration’s preference for looser monetary policy, the Financial Times reported.
Even so, traders have shown reluctance to increase bearish positions on the dollar. “Stepping in front of the train wouldn’t be wise at this juncture, but current levels of dollar bearishness could be difficult to sustain into early 2026,” Schamotta noted.
Yen Firms Ahead of Anticipated BOJ Move
The Japanese yen strengthened 0.2% to 155.015 per dollar, approaching its highest level since mid-November. The currency has gained support from expectations that the Bank of Japan will raise interest rates at its meeting later this month.
Three government officials told Reuters the BOJ is likely to proceed with a December hike, though the policy path for 2025 remains less clear. Markets currently project one full rate increase next year and assign roughly a 50% probability to a second.
Despite short-term yen strength, structural pressures remain. “A still-cautious BOJ, attractive carry for long dollar/yen, and persistent upward pressure on JGB yields from potential fiscal expansion is likely to keep the pressure on yen weakness,” said Chidu Narayanan, head of macro strategy for APAC at Wells Fargo.
Elsewhere, sterling eased 0.2% to $1.3333 but remained near a five-week high after revised data suggested a stronger trajectory for U.K. business activity. Bitcoin, meanwhile, paused its recent rally, dipping 1.7% to $92,142 after gaining more than 8% over the previous two sessions.