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(Bloomberg) -- The dollar is poised for its worst week since June as unpredictable US policymaking weighed on the currency ahead of next week’s Federal Reserve meeting.

The Bloomberg Dollar Spot Index fell to a three-week low on Friday and is down 0.8% over five days. Options traders are now paying a premium to hedge against further dollar losses over the next month — a sharp reversal from a week ago when bullish sentiment on the greenback was the highest since November.

Investors were whipsawed this week as US President Donald Trump first brandished tariffs on Europe over his bid for Greenland, then abruptly dropped them after striking a deal with NATO Secretary General Mark Rutte at the World Economic Forum in Davos.

The fact that the greenback is sliding — even as US Treasury yields rise on bets a resilient economy will keep the Fed on hold — suggests political risks are a bigger factor for the currency than monetary policy.

“The distribution of 2026 returns for the dollar must almost certainly be heavily-skewed to the downside at this point,” Brent Donnelly, the president of Spectra Markets and a former currency trader, wrote in a note. “The world is realizing that the US policy nightmare is not over.”

Money markets favor two quarter-point interest rate cuts this year, and price in almost no chance of a move next week. One-week volatility, which captures the Federal Reserve policy decision on Jan. 28, climbed to its highest level in more than a month.

Applications for US unemployment benefits were little changed last week, steadying at low levels after a volatile holiday season, according to Labor Department data released Thursday. Initial claims increased by 1,000 to 200,000 in the week ended Jan. 17, while the median forecast in a Bloomberg survey of economists called for 209,000.

“US labor market optimism is not a threat to our moderately bearish dollar view just yet,” said Pat Locke, a New York-based FX strategist at JPMorgan. “US policy event risks also skew net dollar bearish over the next few weeks.”

In a hint of where traders’ attention may be pulled next, Trump said he has finished interviewing candidates to serve as the next Fed chair and reiterated that he has someone in mind for the job.