The dollar weakened against all seven major currencies on Friday as markets scaled back expectations for Fed tightening beyond December. A December hike remains the base case, but pricing for further increases has dropped.
The dollar weakened against all seven major currencies on Friday. The Dollar Index fell from around 102.30 on Thursday afternoon to 101.69 by Friday's European session, a decline of approximately 0.6%.
A December hike stays likely, but later hikes fade
Markets still favour a rate hike in December. CME FedWatch showed the probability of a December increase falling from 83.0% on Thursday to 72.7% on Friday.
The larger adjustment came further along the policy path. Overnight index swap pricing for cumulative hikes by June 2027 declined from 2.79 to 1.97 quarter-point hikes, which removes almost one 25bp hike from the expected cycle. The US 2-year Treasury yield declined to around 4.585%.
Tech sell-off and Fed guidance feed the shift
Several developments appear to have contributed, although their individual effects cannot be isolated. Alphabet's sharp decline on Thursday intensified concerns about AI infrastructure spending, and Nasdaq futures were down approximately 2.6% ahead of Friday's US open.
Fed guidance added to the doubt. After Wednesday's decision to hold rates, Chair Kevin Warsh did not commit to a predetermined path for further increases. Meanwhile, headline PCE inflation of 3.6% y/y came in slightly below the 3.7% market expectation.
Yen and sterling lead, euro lags
Yen gained 0.38% and sterling approximately 0.37% against the dollar, while the Swiss franc added around 0.30%.
The euro's gain was more modest, even though Eurozone GDP expanded 0.4% q/q in Q3, beating expectations of 0.2%. Germany grew only 0.2%, France contracted 0.1% and Italy stagnated, and these factors may have limited the euro's participation in the dollar decline.
The next test is the US equity open. A deeper sell-off could push expected rate increases lower again, but worsening risk sentiment could also create defensive demand for the dollar.
Source: ActionForex
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