The greenback faced sustained selling pressure across major pairs, with traders positioning for a potential shift in Fed policy amid signs of cooling inflation and moderating labor market conditions. The weakness reflected growing conviction among market participants that the central bank's hiking cycle has concluded, according to senior currency strategists at major banks.
Euro and Pound Capitalize on Policy Divergence
The euro strengthened for a fourth consecutive session, buoyed by expectations that the European Central Bank will maintain its restrictive stance deeper into 2026 than previously anticipated. Market analysts note that recent commentary from ECB officials has struck a more hawkish tone, contrasting with the Fed's increasingly dovish tilt. Meanwhile, sterling gained ground as traders priced out aggressive Bank of England easing bets following stronger-than-expected UK wage growth data released earlier in the week.
Yen Volatility Persists on BoJ Speculation
The Japanese yen exhibited heightened volatility as speculation intensified over potential changes to the Bank of Japan's yield curve control framework in early 2026. Traders say options markets are pricing increased upside for the yen, with institutional investors hedging against a potential policy normalization. The moves come amid reports that Japanese officials are growing more comfortable with gradual currency appreciation after years of ultra-accommodative policy.
Commodities and Digital Assets Benefit From Dollar Weakness
Gold prices trended higher for a third straight week, drawing support from the dollar's decline and falling Treasury yields. Bullion has emerged as a preferred hedge for investors positioning for potential policy uncertainty in 2026, according to precious metals traders. In cryptocurrency markets, Bitcoin extended its recent rally, with market participants citing improved risk appetite and institutional inflows ahead of potential regulatory clarity expected in the new year.
Technical Positioning and Forward Outlook
Technical analysts observe that momentum indicators across major dollar pairs have reached levels not seen since mid-2024, suggesting the potential for continued weakness into the first quarter. However, some traders caution that positioning has become stretched, raising the risk of a sharp reversal should incoming economic data challenge the dovish Fed narrative. The coming week features reduced liquidity due to holiday schedules, which market veterans warn could exacerbate intraday volatility.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.