The dollar weakened broadly against major currencies on Friday, driven by mounting concerns over the US fiscal trajectory and growing conviction that the Federal Reserve will adopt a more dovish stance next year. Market participants say the combination of widening deficits and potential political gridlock over the debt ceiling is weighing on confidence in US assets as the year draws to a close.
Strategists note that Treasury market volatility has increased this week as investors price in greater supply pressures and questions about long-term debt sustainability. The fiscal anxieties have overshadowed relatively stable economic data, shifting focus toward how the Fed might respond to any deterioration in financial conditions. Traders have boosted bets on deeper rate cuts in 2026, with the central bank's next meeting not scheduled until late January.
The dollar's decline is providing support across currency markets. The euro has gained ground as European Central Bank officials push back against expectations for rapid easing, citing sticky core inflation. Sterling has shown resilience despite domestic political uncertainty, with traders citing relative valuation attraction. The yen continues to draw support from expectations that the Bank of Japan will further normalize policy in early 2026. In commodities, gold has strengthened as investors seek alternatives to dollar-denominated assets, while Bitcoin has benefited from institutional allocation flows ahead of year-end rebalancing.
Technical analysts observe that the dollar index has broken below key support levels that held throughout the autumn, suggesting momentum has shifted decisively. With liquidity thinning ahead of the holiday period, market participants warn that moves could become more pronounced. Traders are now positioning for the January FOMC meeting and upcoming US employment data, which could either validate or reverse the current trend. Currency option flows indicate continued demand for downside protection on the dollar through the first quarter.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.