US Dollar Index Faces Biggest Weekly Drop As Fed December Cut Looms

The US Dollar Index faces its most significant weekly decline in four months as traders cut exposure ahead of the Thanksgiving holiday and lean into expectations for a Federal Reserve rate cut in December.

Thin liquidity has magnified intraday moves, which leaves major currency pairs vulnerable to sharp swings around headlines.

Against that backdrop, the dollar has slipped broadly against higher-beta currencies such as the New Zealand and Australian dollars, while also losing ground versus the yen as the Bank of Japan adopts a slightly more hawkish tone.

The euro has eased off intraday highs, but sentiment toward the single currency remains supported by hopes of progress on Ukraine peace talks.

Why Is The US Dollar Index On The Back Foot

The US dollar index has pulled back from a recent six-month high as investors reassess relative growth and interest rate differentials between the United States and its major trading partners.

With the index down on the week, the move marks one of the sharpest setbacks since mid-year, suggesting positioning had become crowded on the long-dollar side.

Holiday-thinned trading conditions around Thanksgiving have further exaggerated price action. With many US-based participants away from their desks, smaller flows from overseas institutions, and algorithmic traders, the index has been pushed lower, especially when they align with the prevailing narrative of a softer policy stance from the Federal Reserve.

Did you know?
The original US Dollar Index basket, launched in 1973, has only been revised once, when the euro replaced several legacy European currencies, so the gauge still reflects an older trade pattern.

How Are Fed Cut Bets Reshaping Dollar Expectations

Rate markets now price in meaningful odds of a Federal Reserve cut at or soon after the December meeting, after a long stretch in which policy was expected to remain firmly on hold.

That adjustment reduces the dollar yield advantage that previously supported the currency against lower rate peers, especially in the G10 complex.

Comments from officials and advisers perceived as sympathetic to an easier policy have reinforced the shift in expectations.

Investors note that if the next Fed chair is seen as more dovish on inflation and growth risks, the dollar could face additional pressure as markets anticipate a quicker or deeper easing cycle over the coming year.

What Do Euro Yen And Swiss Franc Moves Signal

The euro has eased slightly in the latest session after hitting a 1.5-week high, yet it remains near the upper end of its recent range against the dollar.

Traders see scope for further resilience if potential progress on a Ukraine peace deal boosts European growth sentiment and reduces energy market anxiety.

The yen has firmed, with USDJPY drifting lower as Japanese officials adopt a more hawkish tone on inflation and currency stability.

At the same time, the Swiss franc has come into focus as a classic safe-haven currency that could weaken if a durable Ukraine agreement materializes, although analysts caution that uncertainty remains high and any peace dividend may take time to price in.

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Why Are Kiwi And Aussie Outperforming The Greenback

The New Zealand dollar has jumped to a three-week high against the US dollar after the Reserve Bank of New Zealand cut rates but signaled that the easing cycle is likely finished.

Markets interpreted the message and recent data as opening the door to a possible hike by late 2026, which stands in stark contrast to expected US cuts.

The Australian dollar has also gained after hotter-than-expected inflation data suggested that the Reserve Bank of Australia may be done with easing for this cycle.

With Australian policy rates sitting at the top of the G10 league table, many analysts argue that the currency still looks cheap relative to its carry profile and that any sustained dollar softness could unlock further upside.

What Are Traders Watching Into The Next Fed Meeting

In the near term, traders are focused on incoming US data that could confirm or challenge the case for a December cut, including inflation, labor market, and activity indicators.

A run of weaker numbers would likely cement easing expectations and weigh more heavily on the dollar, while upside surprises could trigger a sharp short-covering rally.

Market participants are also watching for intervention risk in pairs such as USDJPY, where Japanese authorities may feel more comfortable acting in thinner liquidity conditions if moves become disorderly.

With positioning tilting against the dollar and volatility likely to stay elevated, currency allocators may continue to favor selective exposure to the euro, yen, kiwi, and Aussie at the expense of the greenback.

Looking ahead, the path of the US dollar index will depend on how quickly the Federal Reserve shifts from restrictive to neutral or supportive policy and how other central banks respond.

If global growth stabilizes and geopolitical risks ease, further diversification away from the dollar could continue, yet any renewed US data strength or policy surprise would quickly remind markets that the greenback still holds powerful cyclical leverage.