Dollar Heads for Worst Week Since June as Key Data Looms

The U.S. dollar was on track for its weakest weekly performance since June, while Treasury prices moved higher, as investors positioned themselves ahead of key economic data expected early next month. Markets increasingly reflect the view that upcoming reports will reinforce expectations for additional Federal Reserve interest-rate cuts in 2026, shaping the outlook for currencies, bonds, and risk assets alike.

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Trading activity has been noticeably lighter this week, with the holiday period reducing volumes and UK markets closed on Friday. In the absence of major near-term catalysts, investor focus has shifted toward a cluster of high-impact U.S. economic releases scheduled for early January. These reports are widely seen as critical in determining whether the Fed’s recent policy pivot has more room to run.

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At the center of that attention is the December employment report, which will offer fresh insight into labor-market conditions following months of gradual cooling. Investors are closely watching whether job growth continues to slow without tipping into outright weakness a balance that policymakers have signaled is essential to sustaining economic expansion while easing inflationary pressures.

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Consumer inflation data will also play a decisive role. After showing signs of moderation earlier this year, price pressures remain a key variable in shaping monetary policy expectations. A softer inflation reading would likely reinforce the market’s belief that the Fed can continue to ease policy next year, while any upside surprise could complicate that narrative and inject renewed volatility into rates and currency markets.

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These data points carry added weight following the Federal Reserve’s latest policy decision. Earlier this month, officials cut borrowing costs for the third consecutive meeting, underscoring their commitment to supporting growth as inflation trends lower.

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The move signaled growing confidence among policymakers that restrictive policy settings are no longer necessary at previous levels, even as they remain cautious about declaring victory over inflation.

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Treasuries have benefited from that shift in sentiment. Bond prices advanced as yields edged lower, reflecting increased demand from investors anticipating a more accommodative policy environment ahead. Longer-dated securities, in particular, have drawn interest as markets price in a slower economy and a Fed that may have further room to cut rates beyond the near term.

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The dollar, meanwhile, has struggled as rate expectations move against it. As investors grow more confident that U.S. interest rates will trend lower relative to other major economies, the currency has lost some of its recent momentum. While the dollar remains historically strong, its pullback this week highlights how sensitive foreign-exchange markets are to even subtle changes in the outlook for monetary policy.

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Holiday-thinned trading has amplified these moves. With fewer participants active, price action has been driven more by positioning and expectations than by new information. That dynamic has left markets particularly vulnerable to sharp reactions once liquidity improves and fresh data enters the picture in January.

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For investors, the coming weeks may prove pivotal. The combination of labor-market and inflation data will help determine whether expectations for rate cuts in 2026 are justified or premature. A continued cooling trend would likely support risk assets and keep downward pressure on yields, while stubborn inflation or unexpected economic strength could force a reassessment.

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Equity markets, too, are watching closely. Lower interest rates have been a key tailwind for stocks, especially growth-oriented sectors sensitive to borrowing costs. Any confirmation that the Fed’s easing cycle has further to run could reinforce that support, while a shift in expectations may prompt a period of consolidation.

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As the year draws to a close, the broader picture remains one of cautious optimism. Investors appear comfortable assuming that the Fed has room to maneuver, but confidence is still conditional on the data. With markets poised to refocus once the holiday lull passes, early January’s economic releases are likely to set the tone for trading and policy expectations well into the new year.

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