Dollar Nears Five Week Low as Markets Price In Fed Cut

The U.S. dollar is holding near a five week low against major currencies as investors ramp up expectations that the Federal Reserve will begin easing monetary policy next week. Traders were pricing roughly an 86 percent chance of a quarter point cut at the Fed's Dec. 9 to 10 meeting, and market pricing implies additional easing next year, sending the dollar index down toward 98.765 before settling flat.

Market attention is focused on incoming U.S. data and the Fed's tone about the path of policy. Initial jobless claims fell to a more than three year low in the latest weekly reading, a signal of labor market strength that may complicate the central bank's decision calculus. That result, however, comes with caveats, as it may have been distorted by the Thanksgiving holiday and earlier government reporting disruptions. The personal consumption expenditures deflator, the Fed's preferred inflation gauge, is due and will be watched for fresh signs of cooling or stickiness in price pressures.

Currency moves were modest but telling. The yen sat near 155.18 per dollar, the euro traded around $1.1647, and sterling changed hands at $1.3326. The relative stability across major currencies suggests markets are primarily adjusting to a recalibration of U.S. interest rate expectations rather than sudden shifts in capital flows. Yet even small moves in the dollar can ripple through global markets. A softer dollar generally eases pressure on commodity prices and can improve terms of trade for emerging markets that have borrowed in dollars, while domestic import prices could edge higher if the dollar declines further.

Policy implications extend beyond the immediate decision next week. If the Fed begins cutting and signals a data dependent but downward leaning path for rates, investors will reassess term premia across fixed income markets and risk appetite for equities. Central banks abroad are also on watch. Divergences in timing and magnitude of easing among major central banks will shape exchange rate dynamics and cross border capital allocation in coming quarters.

Longer term, the shift in pricing reflects a broader narrative that the era of persistently high U.S. policy rates may be giving way to a gradual easing cycle, provided inflation continues to moderate. For households and businesses, the outlook for borrowing costs and mortgage rates will be crucial. For policymakers, the Fed faces the challenge of balancing a still resilient labor market with the need to secure sustained disinflation.

Investors and policy makers will parse the PCE print and the Fed's communications next week for clues on how large the easing cycle might be and how quickly it may unfold. The answer will determine whether the dollar's recent softening is a temporary reaction ahead of a pivot, or the start of a more sustained trend.