FOREX-Dollar steady near five-week low, euro at seven-week high

The euro eased less than 0.1% to $1.1657 but stayed close to the highest level since October 17 it hit in the previous session as data showed business activity in the euro zone expanded at its fastest pace in 30 months in November. The currency is up over 12% this year, on pace for its biggest annual gain since 2017, benefiting from a weak dollar due to tariff uncertainties earlier in the year and lately on rising odds of U.S. rate cuts.

The U.S. dollar was steady near a five-week low after lacklustre U.S. data seemingly cemented the case for a Federal Reserve rate cut next week, providing relief to the yen and pushing the euro to an almost seven-week high. Investors have also been weighing the prospect of White House economic adviser Kevin Hassett taking over as Fed Chair after Jerome Powell's term ends in May. Hassett is expected to push for more rate cuts.

U.S. President Donald Trump said this week he will unveil his pick to succeed Powell early next year, extending a months-long selection process despite previously claiming he had already decided on a candidate. A move to appoint Hassett could pressure the dollar, analysts have said, with bond investors expressing concerns to the U.S. Treasury that Hassett could aggressively cut rates to align with Trump's preferences, the Financial Times reported. Traders are pricing in an 85% chance of a quarter-point rate cut next week, LSEG data showed.

"A Fed rate cut next week is already priced in," said Commerzbank FX analysts Thu Lan Nguyen and Antje Praefcke in a note. "What will be decisive for the dollar, though, is whether there will be new hints regarding the direction of monetary policy in subsequent meetings."

The dollar index, which measures the U.S. currency against six rivals, was little changed at 98.94 after falling for nine straight days. It was languishing near a five-week low and remains down nearly 9% for the year. A Reuters survey showed a sizeable minority of FX strategists are now predicting the dollar to strengthen next year although most largely stuck to forecasts for a softer greenback in 2026 on rate cut wagers.

Thomas Mathews, head of markets for the Asia-Pacific region at Capital Economics, said that given the strength of the U.S. economy, investors may be overestimating how far the Fed will cut in the medium-term, regardless of what it does next week. "That, I think, will keep the dollar from falling too far," he said. The euro eased less than 0.1% to $1.1657 but stayed close to the highest level since October 17 it hit in the previous session as data showed business activity in the euro zone expanded at its fastest pace in 30 months in November.

The currency is up over 12% this year, on pace for its biggest annual gain since 2017, benefiting from a weak dollar due to tariff uncertainties earlier in the year and lately on rising odds of U.S. rate cuts. The European Central Bank is due to meet in two weeks and is broadly expected to stand pat on rates, with markets pricing in only a one-in-four chance of any easing next year.

The yen was flat at 155.22 per dollar, after it inched away from the 10-month low it hit last month as worries of intervention by Tokyo authorities resurfaced. The BOJ is likely to raise rates in December, three government sources familiar with the deliberations told Reuters, although what comes after remains uncertain. "A still cautious BOJ, attractive carry for long dollar/yen and persistent topside pressure to JGB yields on potential fiscal expansion is likely to keep the pressure on yen weakness," said Chidu Narayanan, head of macro strategy in APAC at Wells Fargo. Sterling was at $1.3337, hovering near its highest point since October 28. The Swedish crown dipped against the euro and dollar after the pace of annual inflation slowed in November.

China's yuan weakened slightly but was near a 14-month high after the central bank set a weaker-than-expected official midpoint for the sixth consecutive session, signalling caution over rapid appreciation. The yuan has shrugged off a trade war, slow growth, rock-bottom interest rates and a slump in foreign investment, to head for its sharpest annual gain since the pandemic year of 2020.

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