Dollar heads for worst weekly loss since June as traders price more Fed cuts
The US dollar (DXY) fell 0.8% this week and is set for its largest weekly decline since June, with an approximate 8% drop for 2025 — its biggest yearly fall since 2017. Weakening inflation and jobs data expectations have pushed markets to price in additional Federal Reserve rate cuts in 2026. Ten-year Treasury yields eased to about 4.12% amid steady buying, and traders now put nearly a 90% probability on no change at the next Fed meeting, while still expecting at least two more 25 basis-point cuts by mid‑2026. Risk-sensitive currencies — notably the Australian dollar (AUD) and Norwegian krone — outperformed the dollar. Equities remained robust: the S&P 500 hit new all-time highs during light holiday volumes, marking the fourth winning week in five. Market positioning reflects lower liquidity and a Santa Claus rally; analysts note gains were led by financials and industrials rather than purely tech. Key takeaways for traders: the dollar weakness increases carry and risk-on flows, may lift crypto and equities in the near term, and makes FX pairs with USD base weaker; watch upcoming US jobs and inflation data for potential volatility and signs that would alter the Fed cuts pricing.
Bullish
Dollar weakening driven by expectations of additional Fed rate cuts and softer US jobs/inflation data typically supports risk assets and higher-yielding currencies. Historically, periods when markets price in rate cuts see capital flow out of the safe-haven USD into equities, commodities and crypto — examples include late‑2020 and parts of 2023 when easing expectations helped risk-on rallies. In the short term, reduced dollar demand can lift crypto prices (BTC, ETH) and equity indices as liquidity chases yield and growth; volatility may spike around US jobs and CPI prints that could confirm or reverse rate-cut expectations. In the medium-to-long term, persistent dollar decline combined with confirmed Fed easing could sustain higher risk-asset valuations and foster carry trades, but also raise inflationary pressures and FX volatility. Traders should monitor Treasury yields, Fed guidance, and US macro releases to manage directional risk and position sizing; use tighter stops around key data and consider hedges if positioning for sustained dollar depreciation.