The U.S. dollar declined on Monday, although it stayed near a three-week high ahead of the Federal Reserve’s final policy meeting of the year. Meanwhile, the euro lost ground following data showing mixed regional economic activity.

The Dollar Index, which tracks the U.S. currency against a basket of six other currencies, traded 0.1% lower at 106.580 after hitting a three-week high on Friday.

Dollar Loses Some of Its Gains

The dollar gave back some of its recent gains as traders positioned themselves in anticipation of the Fed cutting interest rates on Wednesday. The central bank is widely expected to reduce its policy target by 25 basis points to a range of 4.25–4.50%.

“Of more interest will be how the Fed prepares to explain skipping its January meeting. The Fed’s new projections should also reduce the number of rate cuts expected in 2025 from four to three. The market has already priced this in, but there seems little reason for the Fed to surprise this week with a dovish tone, so we think the dollar will hold steady,” ING analysts mentioned in a note.

Euro Declines After PMIs

In Europe, EUR/USD dipped slightly to 1.0499 after data showed eurozone business activity remained weak this month, despite signs of economic progress.

S&P Global’s preliminary Eurozone composite purchasing managers’ index (PMI) rose to 49.5 in December from 48.3 in November, remaining below the 50 threshold that separates growth from contraction.

The bloc’s dominant services sector returned to growth, largely offsetting the deepening contraction in manufacturing.

Following last week’s interest rate cut by the European Central Bank (ECB), several ECB officials, including President Christine Lagarde, Pierre Wunsch, and Isabel Schnabel, are expected to speak during this session. ING analysts noted, “The latter two are more hawkish, and there could be upside risks to EUR/USD if they push back against expectations of below-neutral monetary policy rates.”

GBP Recovers from Losses

GBP/USD rose nearly 0.3% to 1.2652, rebounding from last week’s losses after data revealed an unexpected contraction in the U.K. economy in October.

The Bank of England is set to hold its latest monetary policy meeting on Thursday and is expected to cut interest rates by 25 basis points as part of its gradual easing strategy.

Yuan Hit by Economic Weakness

USD/CNY rose 0.2% in Asia to 7.2899, touching two-year highs after further weak economic data emerged from China.

Chinese industrial production met expectations in November, supported by Beijing’s recent stimulus measures. However, retail sales for November fell well short of projections, indicating persistent weakness in consumer spending despite policy support. Meanwhile, Chinese house prices posted only a marginal decline in November, marking the slowest drop in 17 months.

Yen Flat as BoJ Likely to Hold Rates

USD/JPY rose 0.1% to 153.70 after Reuters reported that the Bank of Japan is likely to leave interest rates unchanged this week, contrary to earlier expectations of a hike.

With weak economic momentum in Asia and Europe and cautious policy adjustments in the U.S., markets are bracing for a pivotal week in global financial dynamics.