The US dollar is poised for its most substantial annual decline since 2017, currently weakening amidst growing market expectations for further interest rate cuts by the Federal Reserve next year. This anticipated monetary easing persists despite recently robust US GDP figures, which have done little to temper investor sentiment. Analysts are now factoring in approximately two additional Fed rate reductions in 2026, signaling a challenging outlook for the greenback.
David Mericle, Chief US Economist at Goldman Sachs, elaborated on this monetary policy trajectory, forecasting that the Federal Open Market Committee (FOMC) will likely implement two more 25 basis point cuts, bringing the target rate to 3-3.25 per cent. Mr. Mericle indicated that while this is the base expectation, risks remain tilted towards even lower rates, primarily driven by a projected slowdown in inflation. This perspective underpins the broader market’s bearish view on the dollar.
Against this backdrop, the dollar index, which measures the currency against a basket of its major peers, depreciated to a two-and-a-half-month low of 97.767 on Wednesday. The currency is currently on track to record a nearly 10 per cent loss for the year, marking its steepest annual drop since 2017. Should any further weakness manifest in the final trading week of the year, the dollar’s annual fall could surpass levels not seen since 2003, highlighting a significant shift in global currency dynamics.
The tumultuous year for the dollar has been influenced by a combination of factors, including the lingering effects of President Donald Trump’s past chaotic tariffs. These protectionist measures sparked a crisis of confidence in US assets earlier in the year, contributing to volatility. Furthermore, concerns regarding the Federal Reserve’s independence, amplified by perceived political influence, have also weighed on investor sentiment, adding another layer of uncertainty to the dollar’s performance.
In stark contrast to the dollar’s struggles, the euro and pound sterling have demonstrated considerable strength, each reaching fresh three-month highs. The euro, in particular, has seen an impressive gain of just over 14 per cent for the year, positioning it for its best annual performance since 2003. This robust showing follows the European Central Bank’s decision last week to maintain its rates while revising upwards its growth and inflation projections, effectively signaling an end to near-term monetary easing.
Similarly, sterling has appreciated by more than 8 per cent over the year. Investors are largely anticipating at least one rate cut from the Bank of England in the first half of 2026, with a roughly 50 per cent probability assigned to a second reduction before the year’s end. Beyond major currencies, other smaller European nations with lower debt profiles have also seen their currencies perform strongly against the dollar, including the Norwegian, Swiss, and Swedish crowns, against which the dollar has shed 12 per cent, 13 per cent, and 17 per cent respectively.
The broader trend of dollar weakness has also benefited commodity currencies and precious metals. The Australian dollar has climbed 8.4 per cent, reaching a three-month peak, while the New Zealand dollar touched a two-and-a-half-month high. Concurrently, gold, a traditional safe-haven asset, surged to a fresh record high on Wednesday, underscoring investor flight from currency volatility and inflation concerns, further illustrating the widespread impact of the dollar’s decline.
Meanwhile, the foreign exchange market’s immediate attention remains fixed on the Japanese yen, as traders vigilantly monitor for potential intervention by Japanese authorities to counteract the currency’s persistent slide. Finance Minister Satsuki Katayama issued the strongest warning to date on Tuesday, asserting that Japan maintains a free hand in addressing excessive yen movements, a clear signal of Tokyo’s readiness to step into the market.
Ms. Katayama’s remarks momentarily halted the yen’s depreciation, with the dollar subsequently declining against the Japanese currency. This development follows the Bank of Japan’s long-anticipated rate hike last Friday, a move that had been largely telegraphed to the market. However, comments from Governor Kazuo Ueda disappointed some investors who had anticipated a more hawkish stance, leading to renewed yen weakening in the aftermath of the policy decision.
With trading volumes typically thinning towards the year-end, analysts suggest that this period could present an opportune window for Japanese authorities to intervene effectively. Investors remain on high alert for official yen-buying operations from Tokyo, especially given the currency’s continued vulnerability and the explicit warnings from finance officials, underscoring the delicate balance facing global currency markets as the year concludes.
