Dollar Nears Five-Week Low as Traders Bet on Federal Reserve Rate Cut
December 5, 2025 – London
The U.S. dollar steadied close to a five-week low on Friday amid growing market expectations that the Federal Reserve will reduce interest rates in its upcoming policy meeting. The dollar index, which measures the currency against a basket of six major peers, edged down 0.05% to 99.029, moving back towards Thursday’s five-week low of 98.765. ### Market Focus on Fed Rate Cut
Traders are currently pricing in an 86% probability that the Federal Open Market Committee (FOMC) will deliver a quarter-point rate cut when it convenes on December 9-10. This consensus is supported by expectations of weakening inflation pressures and mixed signals from the U.S. labor market.
Later on Friday, the markets await the release of a delayed key inflation indicator, the Personal Consumption Expenditures (PCE) deflator, which is favored by the Fed. The data, covering September, is forecasted by economists surveyed by LSEG to show a modest 0.2% monthly increase in the core number. However, this reading is not expected to alter the prevailing view that the Fed will ease monetary policy next week.
The market will closely watch for any signals from the Fed that might indicate the extent of further rate cuts planned for 2026, with some traders eyeing the possibility of two additional reductions next year.
Potential Change in Fed Leadership Adds to Easing Bets
Investor sentiment has also been influenced by speculation about a leadership change at the Fed. White House economic adviser Kevin Hassett is considered a front-runner to succeed Jerome Powell as Chair when Powell’s term ends in May. Hassett is widely perceived as favoring a more dovish stance, which could translate to greater accommodation through rate cuts.
Chris Turner, Global Head of Markets at ING, noted, “The dollar remains slightly offered on the view that the Fed will cut rates next week and that the arrival of Kevin Hassett as Fed Chair will somehow make the Fed more dovish.”
U.S. Labor Market Data Clouded by Delays
The U.S. labor market remains an important gauge for policymakers but has become somewhat opaque due to delayed data following the record-long government shutdown. While new claims for unemployment benefits unexpectedly fell to a more than three-year low last week, the figures may be distorted by the recent Thanksgiving holiday.
Additionally, crucial monthly payroll figures for November, normally published on Friday, have been postponed until mid-December, and October’s data was not released. This incomplete picture complicates assessments of the economy’s underlying strength.
Yen Strengthens on Bank of Japan Rate Hike Speculation
In currency markets, the Japanese yen showed notable strength, rising to a near three-week high against the dollar at 155.16 yen after hitting the lowest level since November 17 earlier in the session. The yen’s gain was driven by reports that the Bank of Japan (BOJ) is likely to raise interest rates at its December 19 meeting if no significant economic shocks occur.
Bloomberg and Reuters cited multiple sources indicating BOJ officials are prepared to tighten policy, which would mark a shift from years of accommodative monetary stance.
Other Currency Moves and Upcoming Central Bank Meetings
The euro held steady at $1.1645, close to Thursday’s near three-week high of $1.1682. The British pound added 0.1% to $1.3337, approaching a six-week peak seen in the previous session.
Elsewhere, the Australian dollar rallied 0.3% to $0.6627 after reaching a two-month high, while the Swiss franc remained stable near 0.8034 per dollar.
The week ahead is packed with central bank policy decisions across multiple regions. Following the Fed’s December 9-10 meeting, the Reserve Bank of Australia will decide policy on Tuesday, the Bank of Canada on Wednesday, and the Swiss National Bank on Thursday. The succeeding week will see decisions from the BOJ, European Central Bank, Bank of England, and Sweden’s Riksbank.
Reporting by Joice Alves in London and Kevin Buckland in Tokyo; Editing by Mark Potter and Peter Graff