The US dollar was steady on Friday (December 12) but is still expected to suffer a third straight weekly decline, affected by the prospect of an interest rate cut next year, while the pound was also unchanged after data showed the UK economy unexpectedly shrank in the three months to October.

The dollar index, which measures the US currency against six other currencies, remained flat at 98.34, expected to fall 0.64% weekly. The index is down more than 9% this year, heading for its steepest annual decline since 2017.

Against the weaker dollar, the euro last traded at $1.1737 after rising 0.37% to a more than two-month high on Thursday. The pound was firmer at $1.3383, trading near a seven-week high reached on Thursday, after economic data likely raised expectations of a Bank of England interest rate cut. Both European currencies are poised to post a third straight week of gains against the dollar.

UNCERTAINTY OVER US MONETARY POLICY NEXT YEAR

The Fed cut interest rates as expected this week, but comments from Fed Chairman Jerome Powell and the accompanying statement were viewed by investors as less aggressive than expected and reinforced the dollar selling momentum.

"The US dollar stabilized after the post-Fed sell-off, pressured by expectations of lower interest rates and seasonal factors," said Frantisek Taborsky, FX strategist at ING.

Investors face uncertainty over the direction of US monetary policy next year as inflation trends and the strength of the labor market remain unclear, with traders predicting two rate cuts in 2026, in contrast to policymakers who see only one cut next year and one in 2027.

How monetary policy evolves from here will depend on economic data still lagging behind the impact of the 43-day federal government shutdown in October and November. This comes ahead of the US midterm elections, which are likely to focus on economic performance, with President Donald Trump pushing for sharper rate cuts.

Also in the market spotlight is the question of who will be the next Fed chair and how that will impact growing concerns about the central bank's independence under Trump.

BRITISH ECONOMY SLUMBS

Sterling weakened slightly after data showed gross domestic product (GDP) contracted by 0.1% in the August-October period. Economists polled by Reuters had expected a flat figure.

"At this stage it's not entirely clear whether the recent economic weakness marks a fundamental downturn or whether it reflects a reduction in spending ahead of the budget and whether these measures are temporary," said Philip Shaw, chief economist at Investec. Finance Minister Rachel Reeves presented a tax-hike budget on November 26.

The latest data reinforced speculation that the Bank of England (BoE) will cut interest rates next week, although such a cut has been almost entirely expected for several weeks.

The Japanese yen weakened 0.2% to 155.87 per dollar ahead of next week's Bank of Japan meeting, where a rate hike is widely expected. Market focus is on policymakers' comments on what Japan's interest rate path will look like in 2026.

Reuters reported that the Bank of Japan is likely to maintain its pledge next week to continue raising interest rates, but emphasized that the pace of further increases will depend on how the economy reacts to each hike.

The Swiss franc held steady at 0.7951 per U.S. dollar, after rising to a nearly one-month high on Thursday. The Swiss National Bank kept its benchmark interest rate at 0% on Thursday and said the recent agreement to reduce U.S. tariffs on Swiss goods has improved the economic outlook, although inflation is somewhat below expectations. (alg)

Source: Reuters.com