The dollar is on track for its worst year since 2017, with the Bloomberg Dollar Spot Index falling approximately 8% this year, largely due to expectations of Federal Reserve interest-rate cuts. Investors anticipate further declines if the next Federal Reserve chief pursues deeper rate cuts, as expected.

The dollar's decline accelerated after President Trump initiated tariffs in April and subsequently campaigned for a dovish appointee to lead the Fed after Jerome Powell's term ends. Yusuke Miyairi, a foreign-exchange strategist at Nomura, stated that the Fed will be the biggest factor for the dollar in the first quarter, emphasizing the importance of the January and March meetings, as well as the selection of the next Fed Chair.

The anticipated divergence in policy between the U.S. and other developed nations is contributing to the dollar's weakness. With markets pricing in at least two rate reductions for the U.S. next year, the dollar's appeal is diminished compared to the euro, which has strengthened due to benign inflation and anticipated European defense spending, keeping rate-cut expectations low. Furthermore, rate traders are betting on hikes in Canada, Sweden, and Australia.

The dollar gauge experienced a temporary rise of 0.2% on Wednesday following Labor Department data, but the overall trend remains downward. The dollar's performance is closely tied to the future direction of U.S. monetary policy and the global economic landscape.