The dollar weakened against all major peers Friday, capping its steepest weekly slide in over two months as renewed speculation over Federal Reserve rate cuts collided with optimism over China's economic stimulus, sending commodity-linked currencies to fresh highs.
Traders say the greenback's selloff accelerated after Wednesday's softer-than-expected US jobless claims data and a surprise decline in manufacturing PMI, which fueled bets that the Fed could signal a more accommodative stance at its January 28-29 meeting. The Australian and Canadian dollars emerged as the session's top performers, gaining more than 1.2% on the week as Beijing officials hinted at expanded infrastructure spending and property market support measures.
"The market is recalibrating its Fed expectations while simultaneously pricing in a Chinese growth rebound," said Sarah Chen, head of G10 FX strategy at Citadel Markets. "That combination is toxic for dollar bulls." Positioning data shows leveraged funds have slashed long dollar exposures to their lowest levels since early December, according to Commodity Futures Trading Commission figures released Thursday.
EUR/USD traded in a tight range but maintained upward momentum, with traders noting that options markets reflect growing demand for euro calls. The yen saw two-way volatility as Bank of Japan officials maintained their dovish posture in public comments, though some strategists note that speculative accounts continue building modest long positions in anticipation of eventual policy normalization later in 2026.
Technical analysts point to the dollar index breaking below its 200-day moving average as a key development that could trigger further algorithmic selling. Momentum indicators show the decline has room to run, with relative strength indexes not yet reaching oversold territory. "We're watching the 2025 lows as the next critical support zone," said Marcus Thompson, chief technical strategist at Pinnacle Trading, without citing specific figures.
Forward-looking focus now shifts to next week's Fed decision, where Chair Jerome Powell's commentary on inflation progress and labor market cooling will be scrutinized for timing cues on potential rate cuts. Money markets are pricing roughly 60% odds of a cut by March, up from 40% at the start of the week. Additionally, China's National People's Congress preparatory meetings next month could provide clearer details on fiscal expansion plans, potentially extending the commodity currency rally.
Commodity markets mirrored the currency moves, with gold prices extending their climb as real US yields compressed, while crude oil futures advanced on the China demand narrative. Bitcoin held steady near recent ranges as crypto traders largely ignored traditional currency volatility.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.