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The US dollar traded heavily last week, losing ground to all the G10 currencies, but the Swiss franc. The franc seemed to be dragged down by the use of it rather than the yen as a funding currency. Japanese officials protested the pace of the yen's weakness, while Swiss authorities seem to welcome the franc's pullback, not only against the dollar but the euro, too. Elsewhere, the Mexican peso and Chinese yuan rose to new highs for the year last week. 

The key event next week is the Federal Reserve meeting. There are three other G10 central banks that meet, but the others, the Reserve Bank Australia, the Swiss National Bank, and the Bank of Canada will stand pat. There is little doubt in the market's mind that the Federal Reserve will cut rates in the week ahead. In anticipation of the Fed's cuts in September and October, the dollar was sold, but it rallied after the cuts were delivered. 

U.S.

Drivers: As the market expectations have swung back toward a Fed cut this week, the dollar waned. We highlight three interest rate spreads. The first is the US two-year premium over Germany. It has fallen to new lows since September 2024 below 145 bp. It peaked this year in February near 225 bp. The second is the US 10-year premium over Japan. It is at a 3 1/2 year low around 215 bp. The peak this year was in January, a little over 350 bp. The third spread is the US 10-year premium over China. It reached a record high early in the year, near 315 bp. It is now almost 100 bp narrower. We do not argue for a one-to-one correspondence between the interest rate differential and the dollar's movement. Rather, we understand that 1) the large premium helped to fuel dollar gains and 2) investors demand a higher interest rate premium to hold on to dollars given the policy uncertainty coming from Washington.

Data: The September JOLTS report sand Q3 Employment Cost Index will be reported before the outcome of the FOMC meeting December 10. Alongside the rate decision, the Federal Reserve will update its economic projections. In September, the median "dot" looked anticipated two cuts in 2026 would be appropriate. The median forecast was for 1.8% GDP. 2.6% PCE headline and core inflation, and 4.4% unemployment. The derivatives market is discounting two cuts in 2026 and about 60% of a third, knowing full well that there will be a new chair. 

Prices: The Dollar Index extended its pullback for eight consecutive sessions through the middle of last week. It stabilized in the last two sessions. Market participants are well aware the dollar weakened ahead of September and October rate cuts and then rallied afterwards. This pattern, and the fact that the Dollar Index met the (38.2%) retracement of the rally from the September 17 (Fed Day) low for the year may encourage some short covering. Initial resistance seen near 99.20 and then 99.40-60. 

EMU

Drivers: The euro is the single largest and deepest alternative to the US dollar. The 30-day inverse correlation of changes in the euro and changes in US two- and 10-years and the differentials with Germany are in the -0.40 area. The correlation with equities (S&P, Dax, and Stoxx 600) is mildly positive.

Data: Outside of the Sentix survey, there are no aggregate eurozone reports due. Instead, the more interesting and important data comes from Germany. October factory orders were reported ahead of the weekend, which were well above expectations and reports industrial production first thing Monday and trade on Tuesday. Industrial output likely rose in consecutive months for the first time since January-February 2024. Through September, German exports have risen on average about 0.1% a month, the same pace as the first nine months of last year, after falling an average of 0.2% a month in the same period in 2023. The 1.4% increase in September was the largest of the year. Imports rose by an average of 0.6% a month through September this year and 0.4% a month in the first nine months of 2024 but fell by an average of 0.8% a month in the same 2023 period. The broader measure of trade (current account) will be reported Friday. As a percentage of GDP, it is seen falling to about 5% of GDP this year from 5.7% in 2024. The Bundesbank's forecast is for the current account surplus to remain at 5.7% this year and next seems optimistic. The OECD's projection is 4.8% this year and 3.7% in 2026.

Prices: The euro's eight-day rally was snapped on Thursday after it briefly traded above $1.1680 for the first time in nearly two months. It stopped shy of the (50%) retracement of the losses since the year's high was recorded on September 17 (Fed Day). It consolidated above $1.1635 ahead of the weekend. While there appears to be scope for some backing and filling ahead of the Fed's decision (December 10), a break of the $1.1580-$1.1600 area would be disappointing. 

PRC

Drivers: By steadily lowering the dollar's daily reference rate, the PBOC is signaling and validating the appreciation of the yuan. It is not taking place as fast as China's critics wish but it is taking place. Many continue to suspect that the PBOC is gradually allowing the dollar to fall to CNY7.0. At the same time, the dollar's move against the offshore yuan and changes Dollar Index are about 0.70 correlated over the past 30 sessions up from around 0.40 a month ago.

Data: China's November reserves will be reported in the next couple of days. They have risen every month this year but July. Through October, they have risen by about $141 bln since the end of last year. In 2024 reserves fell by almost $36 bln. Remember reserve growth is function of change in holdings and change in valuation. The reserves are reported in US dollars so the change in the dollar's value against the currencies of other reserve assets is an important element in the change in valuation. There also are much interest China's gold holdings. The price of gold is up over 60% this year (~25% in November) and PBOC has steadily accumulating the yellow metal. While lending figures may be reported next week, we can count on the inflation gauges in the middle of the week. Deflationary forces are moderating. Producer price deflation has ebbed. It is still serious at -2.1% year-over-year in October but that was third consecutive month after reaching -3.6% in June and July. Consumer prices rose 0. 2% year-over-year in October after -0.3% in September and -0.4% in August. The median forecast in Bloomberg's survey is for a 0.7% increase in November, which if accurate, would be the highest of the year and match last year's high. It would be the largest increase since February 2023. The core CPI stood at 1.2% in October. It was last below zero in February.

Prices: After falling to a new low for the year in the middle of last week near CNH7.0540, the greenback consolidated in the last two sessions. It was capped near CNH7.0720. It took the dollar a bit more than a week and a half to fall from around CNH7.1040 to CNH7.0540. There is plenty of time ahead of year-end for the dollar to approach CNH7.0. The dollar fell to almost CNY7.0615 in the middle of last week before steadying. Watch the PBOC's fix for directional clues. On a weekly basis, the fix has been falling since the end of Q3 with one exception in late November.

Japan 

Drivers:   The dollar-yen exchange rate remains sensitive to the broader direction of the dollar but with the 30-day rolling correlation with change in the Dollar Index trending lower to around 0.60, it is the least in seven months. Over the past 30 sessions, the exchange rate is more correlated with changes in the US two-year yield (~0.40) than the 10-year yield (~0.30). Rising long-term yields in Japan have not helped the yen. The rolling 30-day correlation between the exchange rate and Japan's 40-year yield was inverse from late August through early October, but it has turned positive. The year's high of almost 0.50 was seen in mid-November. Counter-intuitively, higher Japanese yields are associated with a stronger dollar against the yen, though 30-day correlation is slightly below 0.25 now. 

Data: The BOJ meeting concludes on December 19. The odds of a rate hike jumped to around 90% from slightly less than 60% at the end of November, after falling to almost 15% on November 21. Although labor earnings have often been cited by BOJ officials, Rengo, the large union umbrella organization, formally adopted 5% (or more) pay increase target in the 2026 wage round, it may not elicit much of a market response. As Q3 GDP will be updated, investors will be reminded that despite low interest rates, an extremely undervalued currency, and a 3% budget deficit, the world's third largest economy contracted at an annualized rate of 1.8% in Q3. Note that net exports shaved 0.2% from Q3 GDP. It appears that the economy found better footing at the start of Q4. The initial estimate of 1.4% jump in October industrial output after a flat Q3 is subject to revision at the end of the week.

Prices: The dollar peaked on November 20, near JPY157.90 and ahead of the weekend, it reached JPY154.35. Although it recovered, and settled above JPY155, the strong rally seen since the Fed's cut on September 17 seems over. The five-day moving average has moved back below the 20-day moving average for the first time since early October, and the dollar settled below its 20-day moving average for the third consecutive session ahead of the weekend. The dollar looks poised to recoup some of its losses in the coming days. The JPY155.60-70 area may offer initial resistance. Above there, the JPY156.50 area may be more formidable. 

UK

Drivers: Sterling has become somewhat less sensitive to the overall movement in the dollar. The rolling 30-day inverse correlation between changes in sterling and changes in the Dollar Index has moderated for an 18-month extreme a little beyond -0.90 in early October to nearly -0.80, which is still strong. On the other hand, the inverse correlation between changes in sterling and the 10-year Gilt yield has moderated even more dramatically. It reached a five-year extreme in early October (~-0.73) and recovered to around -0.25 now. Similarly, sterling's inverse correlation with changes in the US two-year yield, which reached a nearly 20-year extreme in September (~-0.70). It is now near -0.35. Lastly, the government has unveiled a tighter fiscal stance, while the BOE is set to resume its easing of monetary policy. The policy mix, easier monetary policy and less fiscal accommodation, tends to be associated with a stronger exchange rate.

Data: There are two data highlights in the week ahead. In the first part of the week, measures of house prices will be reported. According to Rightmove, house prices have fallen on a year-over-year basis for three months through November. Yet Nationwide's measure, reported last week, showed house prices are up 1.8% year-over-year, the least since June 2024. The other highlight, at the end of the week, is the October GDP and its details. Recall the sum of the monthly GDP readings in Q2 was 0.2% and -0.2% in Q3. Yet, the quarterly print was 0.3% in Q2 and 0.1% in Q3. The median forecast in Bloomberg's survey is 0.2% expansion here in Q4.

Prices: Sterling reached $1.3385 on December 4, its best level since October 22. It met the (50%) retracement of the losses since the September 17 high near $1.3725. It consolidated and held above $1.3320 ahead of the weekend. The consolidation looks constructive, and a move above $1.3400 could see another quick half-cent advance. The daily momentum indicators are stretched. A break of $1.3280-$1.3300 might signal a corrective phase. 

Canada

Drivers: Changes in the US dollar against the Canadian dollar has become less sensitive to the greenback's broader movement. The rolling 30-day correlation between changes in the exchange rate and the Dollar Index reached this year's high in late August, near 0.80. It fell to a nine-month low in November around 0.30 and is now near 0.35. Since late May, the US dollar tended to move against the Canadian dollar in the same direction that US two-year yields were moving, as one might intuitively expect. However, since early last month, the 30-day rolling correlation has spent most of the time inverse. The exchange rate is also inversely correlated with changes in the US S&P 500 (proxy for risk) of around -0.35. The correlation was positive from late May through early July and briefly in mid-August. The 30-day correlation of changes in the exchange rate and changes in Canada's two -year yield recorded this year's high near 0.50 in early October, but for the past month has been inversely correlated and is now near -0.45. 

Data: The Bank of Canada meets on December 10. There is practically no chance of change in policy. In fact, the swaps market has a hike discounted in late 2026. Due to the US government shutdown, Canada delayed its September merchandise trade report. It will be released on December 11. The shock emanating from the US has hit Canada's GDP this year through the trade channel. Consider that in the first eight months of 2024, Canada recorded a merchandise deficit of about C$5.2 bln. In the January-August period this year, Canada reported a merchandise deficit more than five-times greater (~$29.2 bln).

Prices: Encouraged by a sharp drop in the unemployment rate (though about half of it was accounted for by the decline in the participation rate), the Canadian dollar rose by around 0.7% against the US dollar ahead of the weekend, the biggest single-day rally in since late May. The US dollar approached CAD1.3850, holding a little above the (50%) retracement of the rally since the greenback's low for the year was recorded on June 16 (~CAD1.3540). The retracement is CAD1.3840, and the next one (61.8%) is near CAD1.3770. A note of caution comes from the speed of the move, which drove the US dollar below the lower Bollinger Band, which was found slightly above CAD1.3900. 

Australia 

Drivers: The Australian dollar has become more sensitive to the broad direction of the US dollar. The rolling 30-day inverse correlation of changes in the Australian dollar and the Dollar Index peaked in August near -0.85. For the first time since February 2020, it flipped to a positive correlation for a couple of weeks in November, but it back to an inverse correlation of around -0.40. The rolling 30-day correlation between the exchange rate and the US two-year yield is mostly inverse, but around the middle of November it reached slightly above 0.50, its highest since early 2020. It is now near 0.20. Lastly, the 30-day correlation between the Australian dollar and the CRB Index has gone through four phases. The first (Jan-Feb) the rolling correlation hovered near zero. In the second phase, (late Fed through late June), the 30-day correlation was clearly positive and set the high for the year in May, a little above 0.70. In the third phase, the correlation was inverse (late June-mid-September). The inverse correlation extreme was recorded in July near -0.34. The fourth phase saw the correlation turn positive. It peaked in October near 0.54 and held slightly below it in November. It is now near 0.32. 

Data: The Reserve Bank of Australia meets on December 9. Like we noted with the Bank of Canada, there is practically no chance of a change in policy. In fact, the derivative market (swaps and futures) has begun considering that the next move will be a hike. The futures market, for example, has about a 40% chance of a hike by the end of next year. On December 11, Australia reports November jobs data. Through October, Australia created a net of 160k jobs this year (~320k in the first 10 months of 2024). Of those jobs, 143k were full-time positions (245k in the Jan-Oct 2024 period). The unemployment rate was at 4.1% in the first five months of the year and has been at 4.3% since, with the exception of September when it jumped to 4.5% before returning to 4.3% in October. Although the participation rate has jumped around, net-net in October 2025 it was at 67.0%, the same as in October 2024.

Prices: The Australian dollar was easily the best performing G10 currency last week, gaining around 1.2% against the US dollar. In the past two weeks, it has risen by about 2.7%. The Aussie reached almost $0.6650 at the of last week, a level it has not seen since September 18. The year's high was recorded on September 17 (Fed Day), slightly above $0.6705. The daily momentum indicators are stretched and the Australian dollar finished last week above its upper Bollinger Band (~$0.6625 before the weekend), for the second time in the past three sessions. Initial support may be in the $0.6585-$0.6600 area. 

Mexico

Drivers: The peso seemed to have loosened its link with the broad US dollar movement in late October and through the first three weeks of November. The rolling 30-day correlation of changes in the dollar against the peso and the Dollar Index hovered near 0.10 after high for the year was reached in late September (~0.80). However, the correlation has improved and is now back toward around 0. 40. The peso is often risk-sensitive. The rolling 30-day correlation of the dollar against the peso and the S&P 500 reached the most extreme of the year (~-0.75) near the middle of October. It is now around -0.35. Counter-intuitively, the 30-day rolling correlation of changes in the US two-year yield and the dollar against the peso is slightly inverse (~-0.12). It was positive from late May through early October but was inverse from late January through late May. The still-attractive carry and relatively low volatility make the peso a favorite for carry trades.

Data: Ahead of the central bank meeting on December 18, Mexico reports November CPI on December 9. Headline inflation in October stood at 3.57% and the core, at 4.28%. The target for both is 3% +/- 1%. The CPI from the first half of November warns of another firm reading. At the end of the week, Mexico reports October industrial output. Mexico's industrial production has contracted for four months through September. The economy contracted by 0. 3% in Q3, and the threat of a recession drives expectations for another rate cut.

Prices: Ahead of the weekend, the dollar was sold to a new low for the year against the Mexican peso. The low was near MXN18.1525. The greenback stabilizes but held below the previous low around MXN18.20. The dollar slipped through the lower Bollinger Band (MXN18.1930) but settled slightly above it. The MXN18.18 area was the (61.8%) retracement of the rally from the April 2024 low (~MXN16.2615) before the rally ahead of the election. The MXN18.00 area offers psychological support, but the next important chart area may be closer to MXN17.60. 

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