The US dollar was steady on Friday, but remained on track to post a third consecutive weekly decline, weighed down by expectations of interest rate cuts next year, while the British pound was little changed after data showed the UK economy contracted unexpectedly in the three months through October.
The dollar index—which measures the US currency against six major peers—held at 98.34 points, heading for a weekly decline of 0.64%. The index has now fallen more than 9% year-to-date, on course for its largest annual drop since 2017.
Amid dollar weakness, the euro rose to trade at $1.1737 after gaining 0.37% on Thursday, when it climbed to its highest level in more than two months. Sterling also edged up to $1.3383, hovering near a seven-week high hit on Thursday, supported by economic data that reinforced expectations of a Bank of England rate cut.
Both European currencies are on track to post a third straight weekly gain against the dollar.
Uncertainty over Fed policy next year
The Federal Reserve cut interest rates this week as expected, but comments from Chair Jerome Powell and the accompanying statement were less hawkish than investors had anticipated, reinforcing dollar selling pressure.
“The US dollar is stabilizing after the post-Fed selloff, but it remains under pressure from rate cut expectations and seasonal factors,” said Frantisek Taborsky, currency strategist at ING.
Investors are facing significant uncertainty over the path of US monetary policy next year, as inflation trends and labor market strength remain unclear. Markets are currently pricing in two rate cuts in 2026, compared with policymakers’ projections of one cut next year and another in 2027.
The policy outlook will depend on upcoming economic data, which has been delayed by the impact of the 43-day federal government shutdown in October and November. This comes as the United States heads toward midterm elections, expected to focus heavily on economic performance, amid calls from President Donald Trump for deeper interest rate cuts.
Markets are also closely watching who will succeed Powell as Fed chair and how that transition could affect growing concerns over central bank independence under the Trump administration.
UK economic setback
Sterling dipped slightly after data showed UK gross domestic product contracted by 0.1% in the three months from August to October, compared with expectations for a flat reading in a Reuters poll of economists.
“It is not entirely clear at this stage whether the recent weakness points to an underlying slowdown, or reflects reduced spending ahead of the budget announcement, and to what extent these moves are temporary,” said Philip Shaw, chief economist at Investec.
Finance Minister Rachel Reeves delivered a tax-raising budget on November 26.
The data strengthened bets that the Bank of England will cut interest rates next week, although such a move had already been largely priced in by markets for several weeks.
Yen and franc ahead of central bank meetings
The Japanese yen weakened by 0.2% to 155.87 per dollar ahead of the Bank of Japan’s meeting next week, where expectations broadly point to a rate hike. Markets are focused on policymakers’ guidance regarding the interest rate path in 2026.
Reuters reported that the Bank of Japan is likely to maintain its commitment to further rate increases, while stressing that the pace of future hikes will depend on how the economy responds to each move.
Meanwhile, the Swiss franc was steady at 0.7951 per dollar, after rising on Thursday to its strongest level in about a month. The Swiss National Bank has kept interest rates at 0%, saying a recent agreement to reduce US tariffs on Swiss goods had improved the economic outlook, even as inflation has come in below expectations.
