The dollar weakened against all G10 currencies in early European trading Thursday as market participants priced in a more dovish Federal Reserve policy trajectory for 2026. The selling pressure intensified after Wednesday's release of January FOMC minutes revealed a divided committee growing more concerned about lag effects from previous tightening, according to senior currency strategists at major banks.
"The minutes clearly showed a shift in the internal debate," said a London-based FX trader at a leading hedge fund. "Several participants emphasized the risks of overtightening, which markets interpreted as a green light to price in earlier and deeper cuts." The repricing pushed the dollar index to its lowest level since November, though traders declined to specify exact levels given the velocity of the move.
EUR/USD momentum accelerated as the pair tested the upper bounds of its three-month trading range, with traders citing widening rate differentials favoring the euro. The yen also gained ground against the dollar, with USD/JPY sliding for a fourth consecutive session as Bank of Japan officials reiterated their commitment to gradual normalization. Commodity currencies led by the Australian and Canadian dollars posted the strongest gains, bolstered by resilient energy prices and improving risk sentiment.
Gold rallied sharply, with bullion extending its February climb as investors sought hedges against potential dollar depreciation and ongoing geopolitical tensions in the Middle East. "We're seeing institutional flows return to precious metals after a period of consolidation," noted a commodities analyst in New York. The rally pushed gold through key technical resistance levels, though market participants refrained from citing specific price targets.
Looking ahead, traders are positioning for Friday's US retail sales data and next week's manufacturing PMI releases, which could either validate or reverse the current dovish Fed narrative. Options markets show elevated demand for dollar downside protection through March expiry, suggesting conviction in the bearish thesis remains firm 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.