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 than currently projected.
The dollar's decline accelerated after President Trump's imposition of tariffs in April and his subsequent push for a dovish Fed chair appointment, according to market analysts. 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 decision regarding Jerome Powell's successor.
The anticipated divergence in monetary 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 currencies where interest rate hikes are expected.
The euro has strengthened against the dollar due to benign inflation and anticipated increases in European defense spending, which have reduced expectations of rate cuts in the Eurozone. Conversely, rate traders are betting on rate hikes in countries like Canada, Sweden, and Australia, further bolstering their respective currencies against the dollar.
The dollar gauge experienced a temporary increase of 0.2% on Wednesday following the release of Labor Department data, but the overall trend remains downward. The market's focus remains on the future direction of the Federal Reserve's monetary policy and the appointment of the next Fed chair, which are expected to be key drivers of the dollar's performance in the coming months.
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