Last week saw a faster acceleration in the weakening of the US dollar amid growing rumors about a possible change in the Federal Reserve’s leadership and increasingly convincing signs of stress in the US labor market. Donald Trump’s push for aggressive rate cuts to ease the budget’s debt burden has become a major factor that the market can no longer overlook.
At the same time, the Bank of Japan (BoJ) unexpectedly hinted at a potential rate hike as early as December, while the Australian dollar (AUD) strengthened on rising inflation data. Global dynamics clearly show mounting pressure on the USD.
🔑Key factors:
Political factor (Fed): President Trump’s announcement of his nominee for Fed Chair (with Kevin Hassett, a known dovish advocate, seen as the leading candidate) has raised expectations of an aggressive rate cut. This is a central driver of USD weakness.
Weak economy: ADP data (a drop of 32,000 private-sector jobs) and the ISM Services Index (with its employment sub-index contracting) reinforce the picture of a weakening labor market.
Debt burden: The rapid rise in federal debt servicing costs (now over 17% of the budget) is pushing Trump to demand a rate cut as the only quick way to narrow the fiscal gap.
Inflation risk: Revenue from high tariffs is being used to sustain consumer demand, which is effectively adding inflationary pressure. If the Fed cuts rates while inflation remains elevated, long-term inflation expectations and bond yields may rise, which would not address the debt problem.
Market expectations: CME Group futures now show a 90% probability of a 25 bp rate cut on December 10.
Bottom line: The US dollar remains under heavy pressure due to a widening gap between political demands for rate cuts and ongoing inflation risks. The chances of a near-term USD rebound remain low.
🔑Key factors:
BoJ signal: Bank of Japan Governor Kazuo Ueda delivered the strongest hint yet of a potential rate hike at the December meeting.
Market expectations: Overnight index swaps now price nearly a 90% chance of a hike this month (up from 60% the week before).
Domestic pressure: A stronger yen will help reduce import costs, easing inflationary pressure for Japanese households.
Political support: Key members of Prime Minister Sanae Takaichi’s government have no intention of obstructing the BoJ’s policy normalization.
Bottom line: The yen has strengthened significantly. The expected BoJ rate hike, combined with the Fed’s easing trajectory, is creating a powerful divergence backdrop that favors the JPY.
🔑Key factors:
Inflation growth: The Consumer Price Index (CPI) rose to 3.8% year-over-year (above the RBA’s 2–3% target), and the trimmed mean CPI increased by 3.3% month-on-month.
Monetary policy signal: Australia’s inflation trend conflicts with expectations of US monetary easing. This supports the RBA’s hawkish stance and lowers the likelihood of further rate cuts.
Stock markets: Hopes for geopolitical de-escalation and a Fed rate cut are boosting global risk appetite, which traditionally benefits the AUD.
Bottom line: The Australian dollar maintains strong momentum. With inflation running above target and the USD weakening, conditions continue to support upward movement in AUD/USD.
🔑Key factors:
US support: The pound’s rise is driven mainly by USD weakness tied to rumors about Hassett’s candidacy and soft US labor data.
Bank of England (BoE): The UK economy is showing better-than-expected growth. This could moderate the speed of BoE rate cuts, although markets still price in a 90% probability of a cut on December 18.
External growth: The Canadian dollar’s upside is also tied to broad USD weakness and stronger global risk appetite rather than domestic strength.
Economic weakness: Q3 GDP grew mostly because of a sharp drop in imports (-8.6% Quarter-over-Quarter), while final domestic demand is stagnating. Canada’s labor market outlook points to zero job growth.
Weak dollar: Indirect indicators (gold continuing to rise, the yuan reaching a 14-month high) reinforce the overall downward pressure on the USD. The labor market remains stagnant, and GDP forecasts continue to worsen.
Key Events of the Week (ISM, PCE):
ISM reports (employment and business activity).
ADP private-sector employment.
PCE personal consumption expenditures (the Fed’s main inflation gauge) arriving on Friday.
Forecast: Increased volatility is expected, along with a gradual weakening of the dollar against most major currencies, especially if the PCE data confirms easing inflation pressures and speculation about a more “dovish” Fed chairman grows stronger.
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