Dollar Slips Slightly as Rate-Cut Expectations Weigh on Sentiment

The US dollar edged lower on Friday, losing less than 0.1%, though it remained comfortably above the five-week low it reached on Thursday. The mild pullback came as stronger equity markets reduced demand for safe-haven liquidity, while growing expectations of an interest-rate cut at next week’s Federal Open Market Committee (FOMC) meeting continued to pressure the greenback.

Despite these headwinds, the dollar found some support after the University of Michigan’s Consumer Sentiment Index for December surprised to the upside, helping to limit losses.

Political developments also added an extra layer of uncertainty. President Trump stated earlier this week that he plans to announce his nominee for the next Federal Reserve Chair in early 2026. According to recent reports, Kevin Hassett — director of the National Economic Council — is viewed as the frontrunner to replace current Chair Jerome Powell. Markets see Hassett as leaning toward more accommodative monetary policy, making his potential nomination a bearish factor for the dollar. His alignment with the administration’s preference for lower interest rates could also spark fresh questions about the Fed’s independence.

US Economic Data: Steady Signals in Spending, Income, and Inflation
Recent economic indicators painted a picture of stable consumer activity. Personal spending rose 0.3% month-on-month, matching expectations, while personal income increased by a stronger-than-expected 0.4%.

The core Personal Consumption Expenditures (PCE) Price Index — the Federal Reserve’s preferred inflation gauge — climbed 0.3% on the month and 2.8% year-on-year, in line with forecasts and consistent with a gradual cooling of inflationary pressures.

Consumer sentiment also improved notably. The University of Michigan index jumped 2.3 points to 53.3, surpassing expectations of 52.0, and signaling a modest lift in household confidence despite ongoing uncertainty around monetary policy.

With mixed forces at play — dovish policy expectations on one side and supportive economic data on the other — the dollar remains delicately balanced as markets await next week’s Fed decision and any updates on the central bank’s future leadership.