The dollar weakened broadly on Friday as traders positioned for an extended Federal Reserve policy pause, with month-end rebalancing flows exacerbating the move in subdued post-Thanksgiving trading. Market participants noted that comments from Fed officials throughout the week reinforced expectations that the central bank would hold rates steady through the first quarter of 2026, prompting institutional investors to reduce dollar allocations.
According to senior traders at major banks, the selling pressure intensified as portfolio managers adjusted hedges and rebalanced positions ahead of month-end benchmarks. "We're seeing classic month-end dynamics, but they're amplified by the Fed's clear signal that they're done hiking," said a senior currency strategist at a European investment bank. "Thin liquidity is making the moves look more dramatic than they might otherwise be."
The policy divergence theme resurfaced as other major central banks maintained more hawkish stances. European Central Bank officials continued to push back against rate cut speculation, with several Governing Council members emphasizing that inflation remains above target. Meanwhile, the Bank of England's latest meeting minutes suggested a more cautious approach to easing than markets had priced. This contrast has driven EUR/USD and GBP/USD trending higher throughout November, with momentum indicators showing sustained buying interest.
Geopolitical risk premiums also supported alternative assets, with gold rallying to multi-month highs as tensions in the South China Sea escalated following naval exercises by regional powers. Oil markets faced conflicting pressures, with OPEC+ delegates hinting at a potential output increase next week while inventory data showed larger-than-expected draws. Bitcoin gained traction amid reports that a major US pension fund had allocated to crypto custody solutions, though regulatory uncertainty lingered ahead of SEC leadership changes expected in January.
Technical analysts noted that the dollar index had broken below its 50-day moving average, with momentum oscillators suggesting further weakness could materialize if key support zones fail to hold. Traders are now positioning for next week's ISM manufacturing data and non-farm payrolls, which could either confirm or challenge the Fed's dovish tilt. Options markets showed increased demand for dollar downside protection through mid-December, indicating persistent bearish sentiment among institutional players.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.