The U.S. dollar moved slightly higher early Friday as markets further dialed back expectations for a Federal Reserve rate cut in December. Even so, the currency remained on track to finish the week in the red as investors waited for clearer policy signals now that the U.S. government has reopened.
At 04:05 ET (09:05 GMT), the Dollar Index, which measures the greenback against six major peers, was up 0.1% at 99.125, though it remained on pace for a roughly 0.4% weekly decline.
Dollar heading for a down week
The dollar found modest support after several Fed officials reiterated overnight that they were cautious about easing policy further, pointing to inflation concerns and resilience in the labor market.
Minneapolis Fed President Neel Kashkari told Bloomberg that he opposed last month’s rate cut and is undecided about supporting another move in December.
Likewise, St. Louis Fed President Alberto Musalem and Cleveland Fed President Beth Hammack warned that lowering rates too quickly risked making policy “overly accommodative” while inflation remains elevated.
Market pricing now reflects slightly above 50% odds of a quarter-point cut at the Fed’s December 10 meeting, according to CME Group’s FedWatch tool — down from around 63% a day earlier.
Still, traders are reluctant to rebuild long-dollar bets until they see the incoming backlog of U.S. economic data following the shutdown.
Analysts at ING wrote that “While the move in the dollar fits our bearish view, it feels a bit premature and at risk of rapid reversal should the initial batch of U.S. data prove not as bad as seemingly priced in.”
Sterling pressured by fiscal uncertainty
In Europe, GBP/USD slipped 0.2% to 1.3172, giving back some of the previous night’s gains against a soft dollar.
The pullback followed a Financial Times report stating that U.K. Prime Minister Keir Starmer and Finance Minister Rachel Reeves have scrapped plans for income tax increases — a notable pivot just ahead of the November 26 budget.
ING commented, “It’s not clear how Reeves plans to fill the £30bn fiscal hole without touching income tax. Media reports are currently suggesting a number of options being considered. One appears to be freezing the threshold for income tax brackets, which would have a similar fiscal effect as raising the rate on one bracket and could be well received by markets.”
EUR/USD held near flat at 1.1632 after climbing to a two-week high on Thursday. Investors now await fresh eurozone GDP numbers, expected to show 0.2% quarterly growth for Q3, slightly above the 0.1% expansion recorded in Q2.
ING added that “EUR/USD has now entirely erased its undervaluation gap, and we now feel less confident about short-term upside unless U.S. data come in soft. We see some correction risks today, with a return below 1.160 surely possible.”
Yuan softens after weak Chinese reports
In Asia, USD/CNY ticked up 0.1% to 7.1007 after a round of disappointing October data from China.
Industrial output rose less than expected, while fixed-asset investment contracted sharply, highlighting persistent hesitancy among firms to invest. Retail sales offered the only positive surprise, albeit with slower momentum than in September.
USD/JPY edged up to 154.60 after briefly dropping below 155 the previous day. The 155 level remains in focus due to past episodes of Japanese government intervention.
Meanwhile, AUD/USD jumped 0.6% to 0.6577 after stronger-than-forecast employment figures reduced expectations for further rate cuts by the Reserve Bank of Australia.