The U.S. dollar held its ground on Thursday but continued to trade near recent lows, with soft economic readings reinforcing expectations that the Federal Reserve will cut interest rates next week.

At 04:50 ET (09:50 GMT), the Dollar Index — a gauge of the greenback against six major currencies — was nearly flat at 98.805, hovering around a five-week low and down almost 9% year-to-date.

All eyes on next week’s Fed meeting

A run of weak U.S. indicators has strengthened the case for monetary easing, adding pressure on the dollar.

“After yesterday’s 32k drop in ADP payrolls, a Fed cut next week looks even closer to a certainty,” analysts at ING wrote. “The OIS curve is pricing in 25bp, meaning the Fed would face a potentially sharp adverse reaction in risk assets should it decide to hold.”

The bank also noted that markets are pricing in only another 15 basis points of cuts by March, aligning expectations with a “hawkish cut” this month.

“Our view remains that data will justify two more cuts early next year, which underpins our view that the dollar won’t make a comeback even in the seasonally favorable first quarter.”

Sentiment toward the dollar was further affected by remarks from U.S. President Donald Trump, who said he plans to announce his choice to replace Jerome Powell early next year, stretching out a selection process he previously claimed was already settled.

A move to appoint Kevin Hassett, Trump’s economic adviser, could weigh on the currency. The Financial Times reported that bond investors have warned the U.S. Treasury that Hassett might push for more aggressive rate cuts to match Trump’s preferences.

Euro strengthens, heading for its best year since 2017

The euro continued its ascent, with EUR/USD up 0.1% at 1.1677 after touching its highest level in nearly seven weeks. The pair is on track for annual gains of close to 13%.

“We continue to have 1.170 as our EUR/USD target for next week’s Fed meeting and 1.180 as our year-end target,” ING said. “Seasonality should help, but it’s also worth noting that our short-term fair value model continues to point to around 1.1% undervaluation in the pair.”

The European Central Bank meets in two weeks and is widely expected to keep policy unchanged after halting rate cuts in June.

Sterling slipped, with GBP/USD down 0.1% to 1.3340 after fresh data showed U.K. construction activity contracting at its fastest pace since May 2020. S&P Global’s construction PMI dropped to 39.4 from 44.1, extending its longest downturn since the global financial crisis.

Asian currencies diverge as economic signals deepen

Across Asia, the yen firmed as USD/JPY slipped 0.2% to 154.96, reflecting investor focus on U.S. data that support the case for Fed easing.

USD/CNY was 0.1% higher at 7.0691, while AUD/USD added 0.3% to 0.6615, buoyed by continued resilience in the Australian economy.

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