Before the Fed Meets, the Dollar is Set for Its Steepest Weekly Drop in a Month

The U.S. dollar is heading toward its steepest weekly decline in more than a month as investors brace for a Federal Reserve meeting widely expected to kick off a cycle of interest-rate cuts.

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The Bloomberg Spot Dollar Index has slipped 0.3% so far this week, marking its largest retreat since early August. Softer U.S. labor market data has reinforced expectations that the Fed could deliver as much as 75 basis points in cuts before the end of the year. Still, with inflation proving stubborn, analysts believe the dollar is unlikely to collapse outright, leaving currency traders split on where the greenback heads next.

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“Lower rates from the Fed will put significant pressure on the U.S. dollar,” wrote Michael Pfister, foreign-exchange strategist at Commerzbank, in a recent note. However, he added that persistent inflationary pressures suggest the dollar’s decline will be gradual, describing it as more of a “slow bleed than a sudden crash.”

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Among forecasters, Commerzbank holds one of the most bearish outlooks. In a Bloomberg survey, the German lender predicted the euro could strengthen to $1.22 by year-end as aggressive Fed easing takes hold. Such a move would represent about a 4% pullback for the dollar compared to current levels.

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Markets have already priced in a quarter-point reduction in rates at the Fed’s meeting next week, but traders will be listening closely for any signals about policymakers’ concerns over sticky inflation.

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While weaker job growth has opened the door for looser monetary policy, elevated prices remain a complicating factor that could temper the Fed’s willingness to ease too aggressively.

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The debate is also playing out in the options market. Measures of volatility skew an indicator of whether traders are leaning more heavily toward dollar calls or puts are hovering close to neutral. That balance suggests investors are deeply divided on the dollar’s near-term path. Technical indicators echo that sentiment, pointing to the narrowest trading ranges for the greenback since March 2024.

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Despite the broadly bearish sentiment among analysts, spot-market positioning tells a more cautious story. According to traders familiar with recent flows, investors are holding lighter exposures than usual, reflecting hesitancy to commit heavily in either direction until more clarity emerges from the Fed.

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The broader picture highlights a tug-of-war between fundamentals and expectations. On one hand, signs of slowing U.S. growth and softer labor market data reinforce the case for rate cuts, a dynamic that typically weighs on the dollar. On the other, inflation’s persistence limits the scope of Fed easing and could prevent the currency from suffering a dramatic sell-off.

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For global markets, the Fed’s next steps are critical. A dovish pivot that emphasizes growth risks could accelerate dollar weakness, boosting commodities and supporting emerging-market currencies. Conversely, a cautious tone focused on inflation risks might provide the dollar with temporary stability, at least until clearer signs of cooling prices emerge.

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Currency strategists note that investor sentiment toward the dollar has shifted dramatically in recent months. Earlier this year, resilience in U.S. economic data and sticky inflation had fueled bets that rates would remain higher for longer, keeping the dollar supported. Now, with momentum slowing and risks tilting toward easing, traders are recalibrating.

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Still, few expect a straight-line move. Instead, the dollar’s trajectory is likely to be bumpy, shaped by each incoming data release on inflation, employment, and growth. For now, the consensus view is that the greenback has entered a weakening phase, but the speed and scale of its decline remain highly uncertain.

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As investors await next week’s Fed decision, the dollar’s muted trading patterns suggest a market in wait-and-see mode. Whether the central bank delivers a clear roadmap for cuts or opts for a more cautious, data-dependent stance will set the tone not only for the greenback but also for broader asset markets heading into year-end.

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