The dollar is on its way to its worst week since July. What's weighing on the exchange rate?

The US dollar ends the week with the worst dynamics for four months on the background of strengthening expectations of the Fed's rate cut soon. The probability of December easing is now estimated at almost 87%, while last week it was at most 50%. Additional risk for the American currency is created by fundamental factors: reduction of its income advantage and growing discussion about dedollarization. All this, according to analysts, forms conditions for further weakening of the dollar.

The dollar is on its way to the worst weekly dynamics since July 21. Traders' bets on the Fed's imminent policy easing are growing, and liquidity in the market is reduced due to the Thanksgiving holiday in the U.S., explains the dynamics of Reuters.

In trading on November 28, the dollar index, which reflects the rate of the U.S. currency against a basket of six key currencies, added 0.1%, but this is a small rebound after five days of decline.

According to CME FedWatch, a tool for monitoring market expectations for Fed decisions, traders estimate the probability of a December rate cut at nearly 87%, up from less than 50% last week. The jump is due to the fact that the long U.S. government shutdown has resulted in few data releases from which the Fed is basing its decisions, Reuters notes. The fresh statistics boosted hopes for easing.

"U.S. manufacturing prices have remained stable and retail sales point to a moderate cooling in consumer activity. All of this keeps a December rate cut likely," Scott Helfstein, head of investment strategy at Global X, told CNBC.

Pressure on the dollar is formed by several factors at once, say analysts of Standard Chattered. The Fed's policy easing cycle that has begun is gradually reducing its yield advantage. While previously rates outside the U.S. fell faster than U.S. rates, now it is the Fed that is moving toward a softer stance. The dollar is still a currency with a relative advantage, but that gap is narrowing - and will probably continue to narrow, analysts suggest.

At the same time, the discussion about dedollarization has intensified, Standard Chattered points out. This is not about a sudden change in the global regime, but about a gradual reassessment of the share of dollar assets in government and institutional portfolios. While dollar dominance remains beyond doubt, even a moderate reversal of capital flows toward assets outside the U.S. can exert pressure - especially since many markets now look more attractive by traditional valuation metrics, the bank's analysts emphasize.

According to the analytical center OMFIF (Official Monetary and Financial Institutions Forum), cited by Barron's, the dollar remains the anchor of global reserves, but confidence in U.S. policy has weakened. This leads to a slow but purposeful reallocation in favor of other assets, the report says. The main beneficiaries of this trend are gold, the euro and the yuan.

In addition, Standard Chattered estimates that the dollar is still considered expensive relative to fundamental benchmarks - such as purchasing power parity or the real effective exchange rate. The overvaluation is correcting gradually, but in the current environment it makes the dollar market more sensitive to any soft data and changes in rate expectations, the analysts wrote.

Taken together, this forms the basis for further weakening of the U.S. currency, even despite possible short-term recovery periods, Standard Chattered said.

This article was AI-translated and verified by a human editor