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 than currently projected. The Bloomberg Dollar Spot Index registered a decrease of approximately 8% over the year, signaling a bearish outlook among traders.
The dollar's struggles began with President Trump's tariff implementations in April and were further exacerbated by expectations that Trump would appoint a dovish successor to Jerome Powell, whose term as Fed Chair concludes next year. This anticipation of a more lenient monetary policy contributed to the dollar's failure to rebound significantly.
Yusuke Miyairi, a foreign-exchange strategist at Nomura, emphasized the Federal Reserve's pivotal role in the dollar's performance during the first quarter of the upcoming year. "The biggest factor for the dollar in first quarter will be the Fed," Miyairi stated, highlighting the importance of the January and March meetings, as well as the uncertainty surrounding Powell's replacement.
The anticipated divergence in policy between the Federal Reserve and other developed nations, with at least two rate reductions already factored in for the coming year, has diminished the dollar's attractiveness to investors. Data from the Commodity Futures Trading Commission, released Wednesday, indicated that traders increased their bearish dollar wagers through Dec. 23. Options trading also suggested further dollar depreciation in January, with a potential for moderation in subsequent months.
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