Investing.com - The U.S. dollar steadied Friday, set to end a volatile week with small gains as traders digested the implications of a new Trump presidency as well as benign Federal Reserve.
At 04:30 ET (09:30 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded flat at 104.372.
The index is on track for a gain of just 0.2% this week, even after gaining 1.5% on Wednesday in the wake of Donald Trump’s election victory, when it recorded its biggest single-day gain since September 2022.
Dollar unwinds Trump gains
The dollar surged to a four-month high on Wednesday as traders positioned for a new Trump administration, with its tariff and immigration policies likely to prompt the Federal Reserve to reduce rates at a slower and shallower pace.
However, some of these gains have been unwound after the Federal Reserve cut interest rates by 25 basis points on Thursday, and signaled the likelihood of further rate cuts ahead as inflation appeared on course to fall to the central bank’s 2% target.
“A large portion of the election move in the dollar has been unwound. That, to us, looks more like a positioning adjustment rather than a rethink of what a Trump presidency means for global markets,” said analysts at ING, in a note.
“Remember that markets got to Election Day broadly pricing in a Trump victory, and while the dollar spiked in reaction to the Republican clean sweep, there are perhaps some questions now on how far the dollar can rally near term given the focus is shifting back to the macroeconomic discussion.”
The US consumer price index for October is due next week, and this could influence market sentiment as the year comes to a close.
Euro weighed by German political crisis
In Europe, EUR/USD dropped 0.2% to 1.0785, with the common currency on course for a weekly loss of around 0.5%, weighed by a political crisis in Germany, the eurozone's biggest economy.
German Chancellor Olaf Scholz on Wednesday sacked his finance minister, paving the way for a snap election after months of disagreements in his three-party coalition.
This political turmoil comes at a critical juncture for Europe's biggest economy, with Trump’s election victory raising the possibility of a trade war with the region's main trading partner.
“EUR/USD traded briefly above 1.080 yesterday on the back of the broad-based unwinding of post-election USD longs,” ING said. “This appears to be a positioning unwinding, and we doubt markets are reconsidering the negative implications of Trump’s expected policies on the eurozone.”
GBP/USD fell 0.2% to 1.2961, with sterling falling further from the psychologically important 1.30 level in the wake of the Bank of England’s latest interest rate cut.
The BoE delivered its second rate cut since 2020 on Thursday, dropping by 25 basis points to 4.75% from 5%, but also indicated that the latest UK Budget could cause inflation to take a year longer to return sustainably to its 2% target.
“A December rate cut is looking rather unlikely following the budget, and markets are also pricing in a very small implied probability,” ING said. “At the same time, we don’t think the budget will significantly derail the BoE’s easing path next year, and we still expect faster cuts in the spring compared to market expectations.”
Yuan looks to NPC meeting
USD/CNY climbed 0.2% to 7.1555, with the yuan weakening slightly with the focus squarely on the NPC meeting, which concludes on Friday, for more cues on Beijing’s plans to roll out fiscal stimulus.
Analysts expect the government to approve at least 10 trillion yuan ($1.6 trillion) in fresh spending for the coming years. The NPC meeting comes after Beijing announced a slew of stimulus measures over the past month, but did not specify their timing or scale.
USD/JPY fell 0.4% to 152.39, with the yen gaining after Japanese ministers issued fresh verbal warnings over potential intervention in the currency market.
AUD/USD fell 0.5% to 0.6646, but was headed for an over 1% weekly gain.