The dollar extended declines against major peers as Federal Reserve officials signaled a prolonged policy pause, creating a widening divergence with global central banks that continue adjusting monetary settings tighter, currency traders said.
Minutes from the Fed's December meeting, released last week, showed policymakers growing confident that inflation would return to target without further rate increases, according to strategists at major dealing banks. The dovish tilt contrasts with recent ECB communications emphasizing persistent services inflation and the BoJ's gradual normalization path, market participants noted.
"The policy divergence trade is back in vogue," said a senior G10 currency strategist at a European investment bank. "Markets are pricing a higher probability that the Fed stays on hold through mid-2026, while the ECB may need to resume tightening and the BoJ continues exiting negative rates."
The euro strengthened as ECB President Lagarde's recent remarks highlighted above-target underlying inflation, with wage growth in Germany and France showing particular resilience. Technical analysts said the single currency has cleared key resistance levels, suggesting potential for further upside momentum.
Meanwhile, the yen gained ground amid mounting speculation that the Bank of Japan could adjust its yield curve control framework at next week's policy meeting. The move would further narrow interest rate differentials with the US, prompting unwinding of popular carry trades funded in yen, according to positioning data from the Commodity Futures Trading Commission.
Gold advanced for a third consecutive session, benefiting from both safe-haven flows amid escalating Middle East tensions and declining real US Treasury yields. The precious metal has also drawn support from central bank purchases, with several emerging market authorities adding to reserves in recent months.
Energy markets remained choppy as traders weighed fresh sanctions discussions against supply concerns. Cryptocurrencies traded mixed, with Bitcoin showing tentative signs of institutional accumulation after year-end selling pressure abated.
Focus turns to January's flash PMI data and the core PCE price index, the Fed's preferred inflation gauge. "Any upside surprise in core PCE could quickly challenge the dovish Fed narrative," said a head of FX trading at a New York-based hedge fund. "But for now, the path of least resistance for the dollar appears lower."
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.