(Bloomberg) — A Bloomberg gauge of the dollar closed out its worst week in more than two months as expectations of Federal Reserve interest-rate cuts coupled with emerging credit risks in the US banking sector weighed on the greenback.
The Bloomberg Dollar Spot Index was little changed in New York trading on Friday but declined some 0.5% from Monday’s open, the largest weekly drop since early August. Policy-sensitive two-year Treasury yields traded near a three-year low, while traders boosted their bets on Fed easing and are now pricing some 50 basis points of rate reductions by December versus 46 basis points on Wednesday.
Fed Governor Christopher Waller this week said that officials can keep lowering 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 steep slide in regional bank shares as two lenders disclosed losses tied to fraudulent loans, although the selling in US stocks abated Friday.
“Volatile sentiment and headline risk extends the somewhat erratic trading in the dollar broadly, but overall dollar slippage on the week remains notable as investors anticipate 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 continue to jolt markets. Multiple factors are hitting the dollar at once, making it hard to pick a bottom in the selloff, according to ING Bank NV analysts Chris Turner and Francesco Pesole.
“A sudden surge in scrutiny of US regional banks is hitting equities and the dollar, which, incidentally, faces the negative drag of a dovish Fed repricing, some hopes for a Ukraine truce, falling oil prices and ongoing US-China trade tensions,” they wrote in a note.
US President Donald Trump on Friday said the high tariff rates threatened by his administration against China are “not sustainable.” US Treasury Secretary Scott Bessent said Friday that will speak by phone with Chinese Vice Premier He Lifeng this evening regarding the status of trade negotiations.
Hedge funds that have bought the dollar versus the yen and the euro earlier this month have been stopped out, while institutional investors are largely sidelined, according to traders familiar with the transactions who asked not to be identified because they aren’t authorized to speak publicly.
In options, near-term sentiment has turned more bearish over the next week even as positioning leans toward a stronger dollar into the end of the year. A measure of option risk reversals over the next week on the dollar-yen pair trades near its most bearish level on the greenback since early August, as measured by the ratio of puts activity to calls.
The US currency has retraced roughly a third of its rebound 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 apparent in both the spot and options markets as major currencies are gravitating back toward recent averages.
“The search for triggers for dollar depreciation continues,” Bank of America currency strategists Adarsh Sinha and Claudio Piron wrote in a note Friday. “US data is largely absent during the government shutdown but conversely creates a future air pocket, when economic releases over a short space of time could amplify FX volatility.”
(Updates to reflect market close. A previous version corrected the extent of the US yield drop in the second paragraph.)
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