The U.S. dollar strengthened slightly on Friday, but the greenback is still facing its sharpest weekly drop since July as traders assess the probability of a rate reduction by the U.S. Federal Reserve next month.

Traders have raised the odds of a quarter-point Fed cut at its December 9-10 meeting to around 87% from roughly 40% a week earlier, a swing that has knocked the dollar lower and trimmed bond yields.

The shift was driven by benign U.S. data and some dovish comments from Fed policymakers, although other officials have called for a more cautious approach to rate changes due to a lack of fresh economic data.

Speculation over a possible appointment of White House economic adviser Kevin Hassett to the Fed Chair role has added another layer to the debate. A Hassett-led policy stance could tilt toward faster and more aggressive easing, a dynamic that would typically put further pressure on the dollar.

In a note, analysts at ING including Francesco Pesole said volatility in currencies should "remain capped due to tight U.S. volumes" following the Thanksgiving holiday. U.S. markets will be open for a shortened session today.

But, they added that the dollar is still "vulnerable to a convergence lower towards short-term swap rates." An ING model "continues to display some short-term dollar overvaluation against most of the G10" group of major economies, the analysts said.

Meanwhile, attention in Japan pivoted to Tokyo's consumer-price readings, which were firmly above the Bank of Japan's 2% target and bolstered expectations that the central bank may start hiking rates again. Among other data points, Japan's industrial output and retail sales came in stronger than expected.

Source: Investing.com