Dollar Heads for Worst Weekly Performance Since May as Policy Turmoil Weighs

The U.S. dollar is on track to post its weakest weekly performance since May, battered by mounting political uncertainty that has overshadowed monetary policy dynamics ahead of the Federal Reserve’s upcoming meeting.

The Bloomberg Dollar Spot Index fell more than 0.5% on Friday alone, extending weekly losses to around 1.4%, its sharpest decline in more than eight months. The selloff accelerated toward the close of London trading, lifting the Japanese yen by more than 1% to its strongest intraday level.

“With rising policy volatility, the U.S. dollar has effectively become America’s shock absorber,” said Erika Camilieri, senior global macro analyst at Manulife Investment Management.

Market volatility intensified this week after U.S. President Donald Trump threatened to impose tariffs on Europe amid a dispute linked to his ambitions over Greenland, only to reverse course abruptly following talks with NATO Secretary General Mark Rutte on the sidelines of the World Economic Forum in Davos.

The episode underscored how unpredictable U.S. policymaking has become, and why political risk is now exerting a greater influence on the dollar than interest-rate expectations.

Notably, the greenback weakened even as U.S. Treasury yields rose, driven by bets that resilient economic growth would allow the Federal Reserve to keep policy restrictive for longer. The divergence highlights a shift in market focus away from fundamentals and toward governance and geopolitical risk.

In a note to clients, Brent Donnelly, president of Spectra Markets and a former currency trader, warned that “the distribution of dollar outcomes in 2026 is heavily skewed to the downside at this stage. The world understands that the nightmare of U.S. policy uncertainty is far from over.”

Options markets are already reflecting that anxiety. Traders have begun paying higher premiums to hedge against further dollar losses over the coming month—a sharp reversal from last week, when bullish bets on the currency were at their highest since November.

The dollar’s weakness rippled across global markets on Friday, most visibly in Japan. The yen surged more than 1% to around 156.14 per dollar.

Earlier in the session, the currency jumped abruptly after Bank of Japan Governor Kazuo Ueda concluded his press conference following the central bank’s policy decision, coinciding with the handover of trading momentum from Asia to Europe. Investor unease deepened when Finance Minister Satsuki Katayama declined to comment on whether authorities had intervened in the market, fueling speculation over potential action to curb yen volatility.

A second leg of yen strength followed as European markets closed and U.S. trading took over.

“This is an uncomfortable reminder of how they stepped in last time,” said Bob Savage, head of markets strategy at BNY in New York. “It’s a Friday, liquidity is thin, and the market isn’t in a position to fight that.”

Elsewhere, the Swiss franc touched its strongest level since September, while the Canadian dollar recorded its best single-day performance since December.

Attention is now turning to the Federal Reserve’s policy meeting scheduled for next week. Financial markets are pricing in a quarter-point rate cut by midyear, with a second reduction increasingly expected in 2026. Short-term volatility gauges tied to the Fed’s January 28 decision have climbed to their highest levels since mid-December.