Dollar softens as investors look ahead to next week’s Fed decision

The U.S. dollar weakened slightly on Friday, though it remained within recent trading ranges as investors looked ahead to next week’s Federal Reserve meeting, where policymakers are widely expected to lower interest rates.

The dollar index eased 0.1% to 98.994, hovering near Thursday’s five-week low of 98.765, and finished the week down 0.5%. According to LSEG data, traders are now pricing in nearly a 90% probability of a rate cut next week, with the potential for two additional cuts next year.

Morgan Stanley said Friday that it now expects the Fed to reduce rates by a quarter percentage point in December, aligning its outlook with JPMorgan and BofA Global Research after dovish comments from Fed officials. All three institutions had previously anticipated no change in rates this month.

Fresh U.S. data showed consumer sentiment improved in early December, though the uptick offered little support for the greenback.

In a separate report delayed by the government shutdown, the PCE Price Index—the Fed’s preferred inflation gauge—rose 0.3% in September, matching August’s increase. Core PCE, which excludes food and energy, climbed 0.2%, also mirroring the prior month’s gain.

Investors are also assessing the possibility that White House economic adviser Kevin Hassett could replace Jerome Powell as Fed chair when his term expires in May—a move that markets believe could lead to further rate cuts.