The dollar recorded a modest rise against major currencies on Thursday, as markets positioned ahead of central bank decisions in the UK, Europe, and Japan.
Sterling remained under pressure after a sharp and unexpected drop in UK inflation data, which reinforced expectations of an interest rate cut by the Bank of England. In contrast, the Japanese yen pared some of the losses seen in the previous session, supported by expectations that the Bank of Japan will raise interest rates on Friday to their highest level in three decades.
The dollar largely ignored comments from US President Donald Trump, who said the next Federal Reserve chair would strongly believe in cutting interest rates.
The dollar index, which measures the US currency against a basket of peers including the yen and the euro, rose by 0.2% to 98.55 points, after posting a similar gain in the previous session.
The yen slipped by 0.1% to ¥155.85 per dollar, extending a 0.6% decline recorded on Wednesday.
The euro fell by 0.2% to $1.1718, while sterling edged slightly lower to $1.3348, following a 0.4% drop in the previous session.
Interest rate futures markets moved to price in nearly a 100% probability that the Bank of England will cut rates by 25 basis points on Thursday, following weaker-than-expected UK inflation data for November. By contrast, the European Central Bank is widely expected to leave interest rates unchanged at its meeting on Thursday, while signaling limited appetite for rate cuts in the near term.
Mohammad Al-Sarraf, analyst at Danske Bank, said: “We do not expect any new monetary policy signals from the ECB, and we find it difficult to imagine the central bank raising interest rates in 2026, or even 2027.”
He added: “However, a rate cut from the Bank of England now seems all but certain, and we are likely to see further weakness in sterling after the announcement.”
Both the Swedish central bank and the Norwegian central bank kept their key interest rates unchanged on Thursday, in line with expectations. The Swedish krona was steady at 10.899 per euro, while the Norwegian krone edged slightly higher to 11.955 per euro.
In Asia, the Bank of Japan appears poised to raise its short-term interest rate from 0.5% to 0.75%, as rising food costs keep inflation above the bank’s 2% target.
According to Vincent Chung, Fixed Income Portfolio Manager at T Rowe Price in Hong Kong, the Bank of Japan could raise interest rates twice in 2026 in an effort to address persistently negative real interest rates.
Chung said: “There are some expectations that the Bank of Japan may not adopt a hawkish tone in its forward guidance, which could lead to some weakness in the yen, but we believe any such weakness would be temporary.”
In the United States, uncertainty remains over the timing of the Federal Reserve’s next interest rate cut, as well as over the central bank’s ability to maintain its independence, amid Trump’s remarks about a potential successor to Fed Chair Jerome Powell, whose term ends in May.
Federal Reserve Governor Christopher Waller said on Wednesday that the US central bank still has room to cut interest rates as signs of labor market weakness increase. His comments contrasted with those of Atlanta Fed President Raphael Bostic, who said on Tuesday that he did not believe last week’s rate cut by the Fed was justified.
Trump, who has expressed a desire to play a role in Federal Reserve decision-making, said in a White House broadcast that he would soon announce his nominee to succeed Powell.
“I will soon announce our next Federal Reserve chair, someone who believes in cutting interest rates, and by a lot, and mortgage payments will fall further,” Trump said.
All known candidates — White House economic adviser Kevin Hassett, former Fed Governor Kevin Warsh, and Christopher Waller — support the view that interest rates should be lower than current levels, although none has suggested cutting rates to the extent advocated by Trump.
