Dollar headed for weekly loss as investors brace for slower Fed hikes

The dollar stood close to a three-month low and was on track for a weekly loss on Friday, as the prospect of the Federal Reserve slowing monetary policy tightening as soon as December dominated investors' minds and kept the mood buoyant.

Trading was thin overnight due to the Thanksgiving holiday in the United States, though most currencies extended their gains against a softer greenback before paring them slightly in early Asia trade.

Sterling GBP=D3 rose more than 0.5% overnight and last stood at $1.21125, close to its over three-month high of $1.2153 hit in the previous session and on track for a nearly 2% weekly gain.

The Japanese yen JPY=EBS jumped roughly 0.7% overnight, and last bought 138.60 per dollar.

Minutes from the Fed's November meeting released earlier this week showed that a "substantial majority" of policymakers agreed it would "likely soon be appropriate" to slow the pace of interest rate hikes -- remarks that sent the greenback tumbling.

The Fed's aggressive interest rate hikes and market expectations of how high the central bank could take them has been a huge driver of the dollar's =USD 10% surge this year.

"We've still got the third successive day of positive risk sentiment... I think that is keeping the US dollar subdued pretty much across the board," said Ray Attrill, head of FX strategy at National Australia Bank.

Against a basket of currencies, the US dollar index =USD stood at 105.94, testing its three-month trough of 105.30 hit last week. It was headed for a weekly loss of nearly 1%.

Also aiding risk sentiment slightly was a survey that showed that German business morale rose further than expected in November.

European Central Bank (ECB) policymakers fear that inflation may be getting entrenched in the euro zone, accounts of its October meeting showed overnight. However, markets are now expecting a more modest, 50 bp move at the December meeting. 

The euro EUR=EBS was 0.06% lower at $1.04045, but remained close to $1.0481, its highest level in over four months hit last week.

"We have the euro zone inflation numbers next week, so I think they are going to be a big test of market pricing ... were we to get another upside surprise on that, then I think that would bring 75 bp back on the agenda," said Attrill.

The Aussie AUD=D3 fell 0.17% to $0.6753, after rising more than 0.4% overnight. The kiwi NZD=D3 slid 0.19% to $0.6252, but that was not far off its three-month peak hit in the previous session.

The New Zealand dollar was headed for a weekly gain of more than 1.5%, aided by the Reserve Bank of New Zealand's 75 bp rate hike earlier in the week and its hawkish rate outlook.

Over in China, markets were also closely watching an impending cut in banks' reserve requirement ratio (RRR).

China will use timely cuts in banks' RRR, alongside other monetary policy tools, to keep liquidity reasonably ample, state media quoted a cabinet meeting as saying.

"We believe it's likely the PBoC (People's Bank of China) may cut RRR by 25 bp for most banks in the next couple of weeks (or even days)," said analysts at Nomura.

"That being said, the RRR is likely to only have a limited positive impact, as we believe the real hurdle for the economy lies in local officials' more zealous implementation of Covid restrictions rather than insufficient loanable funds."

The Chinese offshore yuan CNH=D3 was last 0.1% lower at 7.1759 per dollar.