The dollar is on track for its worst year since 2017, having fallen approximately 8% this year as measured by the Bloomberg Dollar Spot Index, largely due to expectations of future Federal Reserve policy. Investors anticipate further declines if the next Federal Reserve chief pursues deeper interest-rate cuts, diverging from other developed nations.
The dollar's decline accelerated after President Trump's imposition of tariffs in April and his subsequent push for a dovish appointee to lead the Federal Reserve when Jerome Powell's term concludes. "The biggest factor for the dollar in first quarter will be the Fed," said Yusuke Miyairi, a foreign-exchange strategist at Nomura. "And it’s not just the meetings in January and March, but who will be the Fed Chair after Jerome Powell ends his term."
The anticipated rate reductions in the U.S., with at least two cuts already factored into market expectations for the coming year, stand in contrast to the policy paths of other developed economies. This divergence diminishes the dollar's attractiveness to investors.
The euro has strengthened against the dollar, supported by stable inflation and anticipated increases in European defense spending, which have reduced expectations of rate cuts in the Eurozone. Conversely, in countries like Canada, Sweden, and Australia, market participants are betting on potential interest rate hikes.
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, reflecting broader concerns about the future direction of U.S. monetary policy. The market's focus remains on the upcoming Federal Reserve decisions and the appointment of the next Fed chair, which are expected to significantly influence the dollar's trajectory.
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