US dollar suffers worst week since June: What's next?
What's the story
The Bloomberg Dollar Spot Index has recorded its worst week since June, falling by around 0.8%. The index is down nearly 8% this year, marking its steepest annual decline since 2017. The fall comes as traders look forward to economic data due early next month, which could confirm expectations of further Federal Reserve interest rate cuts in 2026.
Market anticipation
Upcoming US economic reports to influence Fed's decisions
With holiday trading and UK markets closed on Friday, investor focus has shifted to major US economic reports expected in early January. The December jobs report and consumer inflation readings will be key in determining the Federal Reserve's next steps, after cutting borrowing costs for the third consecutive meeting this month to support growth.
Currency performance
Risk-sensitive currencies outperform dollar
Risk-sensitive currencies such as the Australian dollar and Norway's krone have outperformed the US dollar this week. Andrew Hazlett, a foreign-exchange trader at Monex Inc, said, "liquidity was thin this week, and that didn't help the dollar, which was already in a relatively weak position." He added that inflation numbers will guide their focus for the Fed's next cut.
Yield trends
Treasury yields dip as dollar weakens
The decline of the greenback has been accompanied by a fall in Treasury yields, with US 10-year yields dipping about two basis points this week to 4.13%. Traders are betting on a 90% chance that the Federal Reserve will hold rates next month but are also predicting another quarter-point cut by mid-year, and one more several months later.
Economic indicators
US unemployment rate and inflation readings impact dollar's value
US unemployment data released this December showed the jobless rate rising to its highest since 2021, while consumer inflation figures were lower than expected. Traders have raised expectations for a weaker US currency for five consecutive days, with a key options gage now the most bearish on the greenback in over three months.