Dollar Caps Worst Week Since August on Fed Bets, Bank Woes

(Bloomberg) — A Bloomberg gauge of the dollar ended its weakest week in more than two months as expectations of Federal Reserve rate cuts along with emerging credit risks in the U.S. banking sector weighed on the greenback. The Bloomberg Dollar Spot Index was little changed in New York trading on Friday, but was down about 0.5% from Monday’s open, the biggest weekly drop since early August. Policy-sensitive two-year Treasury yields traded near a three-year low, while traders strengthened their bets on Fed easing, now pricing in about 50 basis points of rate cuts by December, up from 46 basis points on Wednesday. Fed Governor Christopher Waller said this week that officials could continue to cut interest rates in quarter-percentage-point increments to support a faltering labor market, while Governor Stephen Miran reiterated his view that a move twice that size would be appropriate this month. The comments came against the backdrop of a sharp drop in regional bank shares as two lenders disclosed losses linked to fraudulent loans, although the sell-off in US stocks eased on Friday. “Volatile sentiment and asset risk are broadly extending the somewhat volatile trade in the dollar, but overall dollar slippage on the week remains notable as investors expect easier Fed policy and less supportive yield differentials,” said Shaun Osborne, chief currency strategist at Scotiabank. The dollar also softened as political risks in Japan and France eased this week and trade tensions between the US and China continued to roil markets. According to ING Bank NV analysts Chris Turner and Francesco Pesole, several factors are hitting the dollar at the same time, making it difficult to pick a bottom in the sell-off. “A sudden surge in scrutiny of US regional banks is hitting stocks and the dollar, which incidentally faces the negative drag of a dovish Fed repricing, some hopes of a Ukraine ceasefire, falling oil prices and ongoing US-China trade tensions,” they wrote in a note. US President Donald Trump said on Friday that the high tariff rates threatened by his administration against China are “not sustainable”. US Treasury Secretary Scott Bessent said on Friday that he would speak by phone with Chinese Vice Premier He Lifeng this evening about the status of trade negotiations. Hedge funds that bought the dollar against the yen and the euro earlier this month were halted, while institutional investors were largely sidelined, according to traders familiar with the deals who asked not to be identified because they were not authorized to speak publicly. In options, near-term sentiment has turned more bearish over the next week, even as positioning lends itself to a stronger dollar at the end of the year. A measure of options risk over the next week on the dollar-yen pair is trading near its most bearish level on the greenback since early August, as measured by the ratio of puts to calls. The US currency has retraced about a third of its recovery from September’s three-year low. Europe-based traders say conviction remains thin, with investors keeping positions short-dated and trading one headline at a time. This is evident in both the spot and options markets as major currencies move back to recent averages. “The search for triggers for dollar depreciation continues,” Bank of America currency strategists Adarsh ​​Sinha and Claudio Piron wrote in a note on Friday. “US data is largely absent during the government shutdown, but conversely creates a future air pocket, when economic releases could amplify FX volatility in the short term.” (Updates to reflect market close. An earlier version corrected the magnitude of the U.S. yield decline in the second paragraph.) More stories like this are available on bloomberg.com ©2025 Bloomberg LP