The dollar concluded 2025 experiencing its most significant annual decline in eight years, a trend that investors anticipate will continue into the new year, particularly if the next Federal Reserve chair implements deeper interest-rate cuts. The Bloomberg Dollar Spot Index decreased by approximately 8% over the year, and market analysts are forecasting further weakening of the currency.

The dollar's struggles began following President Trump's implementation of tariffs in April, and it failed to recover substantially, largely due to expectations that Trump would appoint a dovish successor to current Fed Chair Jerome Powell, whose term expires next year. Yusuke Miyairi, a foreign-exchange strategist at Nomura, stated that the primary factor influencing the dollar's performance in the first quarter of the upcoming year will be the Federal Reserve. He emphasized the importance of not only the January and March meetings but also the identity of the next Fed chair.

Expectations of at least two rate reductions in the coming year have created a divergence between the Fed's policy path and that of some of its developed-nation counterparts, diminishing the dollar's attractiveness. According to data released Wednesday by the Commodity Futures Trading Commission, traders increased their bearish dollar bets in the week ending December 23. Options trading suggested further dollar depreciation in January, with a potential moderation of this trend in subsequent months.

The anticipated shift in Fed leadership and the potential for lower interest rates are key drivers behind the dollar's projected weakness. The appointment of a dovish Fed chair could signal a prolonged period of accommodative monetary policy, which typically weighs on a currency. The divergence in monetary policy between the U.S. and other developed economies, such as those in Europe, further exacerbates the dollar's challenges. While the Fed is expected to ease policy, other central banks may maintain or even tighten their stances, making their currencies more appealing to investors.