The U.S. dollar spent Friday on the back foot, with the dollar index hovering near a two-week low and heading for a modest weekly loss. Traders have been cutting long-dollar positions as they wait for a backlog of U.S. data to hit the screens after Washington finally ended its latest government shutdown.

What happened

That retreat is happening even though U.S. Treasury yields have pushed higher and the odds of a Federal Reserve rate cut in December have dropped. The euro has climbed back above $1.16, the Swiss franc is trading near multi-week highs, and high-beta currencies such as the Australian and New Zealand dollars have found some support after earlier risk-off selling.

In Asia, the South Korean won jumped after authorities signalled they were ready to step in to stabilise markets, while the battered Japanese yen managed a modest recovery but is still pinned near a nine-month low around ¥155 per dollar. The onshore Chinese yuan has also strengthened to its firmest level in a year, helped by exporter dollar-selling once key technical levels gave way.

Fed signal vs market reaction

Fed officials, meanwhile, are leaning against the idea of aggressive easing. Cleveland Fed President Beth Hammack reiterated that monetary policy needs to stay “somewhat restrictive” to squeeze still-elevated inflation back toward the 2% target, and she downplayed this year’s drop in the dollar as a move back toward fair value rather than a problem in itself.

Coming after an October rate cut that she opposed, Hammack’s message underlines a central bank that is in no rush to deliver another move at the December 9–10 meeting. Yet the currency market is struggling to take that hawkish tone at face value while investors still have no clear picture of how hard the shutdown hit jobs and activity.

Why it matters for FX

The result is an awkward mix for FX: a Fed that talks tough on inflation, a U.S. economy that may be slowing more sharply than the latest data suggest, and a “data fog” that blurs everyone’s forecasts. In that environment, it is easier for traders to trim dollar exposure and rotate into currencies backed by cleaner macro stories, such as the euro and Swiss franc, or by credible intervention risk, like the won and yen.

For major pairs, that could mean choppy, sideways price action rather than a one-way trend. EUR/USD is trying to build a base above 1.16, USD/JPY remains very sensitive to any hint of Japanese or U.S. officials pushing back against further yen weakness, and high-yielding commodity currencies will likely track swings in global risk sentiment more than the day-to-day headlines from the Fed.

What traders are watching

Over the next two weeks, FX desks will focus on:

• the staggered release of delayed U.S. indicators, especially labour-market and consumer-demand data;
• fresh guidance from Fed speakers as the December meeting approaches;
• any signs of real or verbal intervention in Asia, particularly from Japan and South Korea;
• how equities and credit markets digest a world of fewer rate cuts but still-uncertain growth.