US Dollar Weakens as Fed Rate Cut Speculation Rises | Forex Market Update

The U.S. dollar softened on Thursday after lackluster economic data fueled expectations of a Federal Reserve rate cut in the upcoming meeting. The weaker dollar provided relief to the Japanese yen and pushed the euro to its highest level in nearly seven weeks.

Fed Leadership and Rate Cut Speculation

Investors are closely watching the possibility of White House economic adviser Kevin Hassett taking over as Fed Chair when Jerome Powell’s term ends in May. Analysts suggest Hassett may advocate for further rate cuts, which could put additional pressure on the dollar.

President Donald Trump announced plans to reveal his choice for the next Fed Chair early next year, extending the selection process despite earlier claims of having already decided. Concerns have emerged that Hassett could aggressively cut rates in alignment with Trump’s economic policies.

Market Expectations for Fed Policy

According to CME FedWatch, traders are pricing in an 89% probability of a quarter-point rate cut next week, with roughly 89 basis points of easing expected by the end of 2025. However, economists remain skeptical about the duration and depth of any rate-cut cycle.

Thomas Mathews, head of Asia-Pacific markets at Capital Economics, emphasized that the underlying strength of the U.S. economy may limit medium-term Fed cuts, which could prevent the dollar from declining too sharply.

Dollar Index Falls

The U.S. Dollar Index, measuring the currency against six major rivals, stood at 98.919—near a five-week low—and is down almost 9% year-to-date. Thierry Wizman, global FX and rates strategist at Macquarie, noted that stronger international data, rising Japanese wages, and the potential Fed leadership change have contributed to gains in other currencies.

Euro Hits Seven-Week High

The euro traded at $1.1674 during Asian hours, after reaching its highest level since October 17. The currency is up over 12% in 2025, positioning it for its largest annual gain since 2017. The surge has been driven by a weaker dollar amid global tariff uncertainties and rising expectations of U.S. rate cuts. The European Central Bank is expected to maintain current rates at its upcoming meeting, with only a 25% chance of easing next year.

Yen Stabilizes as BOJ Signals Rate Hike

The Japanese yen remained stable at 155.18 per U.S. dollar as concerns of intervention eased slightly. Japanese bonds have declined due to fiscal concerns over Prime Minister Sanae Takaichi’s extensive spending plan. Market expectations now suggest a potential Bank of Japan rate hike in the coming weeks, following hints from Governor Kazuo Ueda.

Other Major Currency Movements

• Sterling (GBP/USD): $1.33425, near its highest level since October 28

• Australian Dollar (AUD/USD): $0.66075, approaching a one-month high

• New Zealand Dollar (NZD/USD): $0.5774, near a one-month high

Key Takeaways for Forex Traders

• U.S. dollar declines amid Fed rate cut expectations and leadership uncertainty.

• Euro rises to seven-week high, posting its strongest gains since 2017.

• Yen stabilizes as BOJ hints at potential rate adjustments.

• Sterling, AUD, and NZD show upward momentum, signaling broader forex market shifts.

The currency markets remain volatile as traders monitor Fed policy, global economic data, and central bank decisions, suggesting a dynamic finish to the year for forex markets.