Dollar Poised for Biggest Weekly Decline Since June Amid US ‘Policy Turmoil’

Dollar Faces Steepest Weekly Decline Since June

Photographer: Al Drago/Bloomberg

The US dollar is on track for its largest weekly drop since June, as erratic policy decisions in Washington have unsettled investors ahead of the upcoming Federal Reserve meeting.

On Friday, the Bloomberg Dollar Spot Index reached its lowest point in three weeks, falling 0.8% over the past five days. In a notable shift from last week’s bullish outlook, options traders are now paying extra to protect themselves against further declines in the dollar over the next month.

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This week, market volatility intensified after President Donald Trump threatened tariffs on Europe in connection with his Greenland ambitions, only to reverse course following an agreement with NATO Secretary General Mark Rutte at the World Economic Forum in Davos.

The dollar’s decline, despite rising US Treasury yields fueled by expectations of a robust economy keeping the Fed on hold, indicates that political uncertainty is currently exerting more influence on the currency than monetary policy decisions.

"At this stage, the outlook for the dollar in 2026 appears heavily tilted toward further losses," commented Brent Donnelly, president of Spectra Markets and former currency trader. "Global markets are coming to terms with the ongoing unpredictability of US policy."

Money markets are currently pricing in two quarter-point rate cuts for this year, with little expectation of any change at the Fed’s meeting next week. One-week volatility, which encompasses the Fed’s January 28 policy announcement, has surged to its highest level in over a month.

According to data from the US Labor Department released Thursday, new applications for unemployment benefits remained steady last week, holding at low levels after a turbulent holiday period. Initial jobless claims rose by 1,000 to 200,000 for the week ending January 17, while economists surveyed by Bloomberg had anticipated 209,000 claims.

Pat Locke, a foreign exchange strategist at JPMorgan in New York, remarked, "Continued strength in the US labor market hasn’t yet altered our mildly negative outlook for the dollar. Upcoming US policy events are also likely to keep the dollar under pressure in the near term."

Meanwhile, President Trump announced that he has completed interviews for the next Federal Reserve chair and reiterated that he has already chosen his preferred candidate, signaling where market attention may soon shift.

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