The US dollar extended its decline on Friday, hovering near two-month lows as investors digested a firmly dovish shift from the Federal Reserve and signs of softening in the US labor market. With the dollar index trading around 98.3, the greenback is on course for a third straight weekly decline—its longest losing streak since early summer—raising questions about whether the currency is entering a more durable downtrend heading into 2026.

Fed’s Softer Tone Shifts Currency Dynamics

The Fed’s widely expected 25-basis-point rate cut was not the catalyst for the dollar’s selloff; instead, it was the tone. Chair Jerome Powell made clear that further hikes are unlikely, while the Fed’s updated projections showed only one additional reduction penciled in for next year. Markets interpreted this as confirmation that the tightening cycle is effectively over.

Adding further pressure, the Fed announced plans to purchase short-dated Treasury bills to support market liquidity. This pushed yields sharply lower, narrowing the rate differential that has supported dollar strength for much of the past three years. In currency markets—where interest-rate expectations drive capital flows—the shift represents a meaningful realignment.

Rising initial unemployment claims, which posted their largest weekly increase in nearly four and a half years, reinforced the dovish narrative. The labor signal suggests slowing momentum in the US economy, strengthening the case for an easier policy path and weighing on the dollar’s appeal as a yield-advantaged safe-haven asset.

A Stronger Outlook Abroad Compounds the Dollar’s Weakness

The greenback’s slide has also been exacerbated by developments overseas. Markets are pricing in a more hawkish stance from central banks in Australia, Canada, and parts of Europe, as policymakers there contend with stickier inflation and firmer wage dynamics. The shifting policy landscape has widened relative return opportunities for foreign investors, accelerating flows out of US assets.

The euro is poised to see the steepest weekly gains against the dollar, supported by improving sentiment around the Eurozone’s growth outlook. Meanwhile, the Australian and Canadian dollars have gained ground as commodity markets stabilize and rate expectations rise.

While the DXY managed a small uptick to 98.3622 on December 12—up 0.02% from the previous session—it remains down 0.80% over the past month and has fallen 8.08% over the past year. Even with recent volatility, the index sits far from its February 1985 peak of 164.72, underscoring how dramatically the global currency landscape has evolved.

What to Watch Next

The key question for investors is whether the dollar’s decline becomes more entrenched. With the Fed signaling patience, markets will look to incoming data for clues on labor-market resilience, inflation stickiness, and the health of consumer spending. If economic softness persists, the greenback may face continued downside pressure. Conversely, any upside surprises in growth or inflation could force markets to rethink the Fed’s path and stabilize the dollar.

For now, the balance of risks is tilting away from the greenback, with global policy divergence and softening US indicators creating conditions for further weakening into early 2026.