The greenback was largely unchanged on Wednesday in thin year-end trading, but it remains on track for its steepest annual decline since 2017. Market participants say the forces that weighed on the currency through 2025 are unlikely to fade quickly, reinforcing expectations that the dollar’s underperformance could continue into the new year.
A central concern has been the outlook for U.S. monetary policy. The Federal Reserve cut interest rates earlier this month, and traders are already pricing in further easing next year. That stance has been compounded by persistent worries over the central bank’s independence under President Donald Trump, who has repeatedly criticised Chair Jerome Powell and said he will announce a successor in January, ahead of Powell’s term ending in May.
Those dynamics have entrenched a “sell-dollar” bias across markets. According to Commodity Futures Trading Commission data, speculative positioning has remained net-short the dollar since April, reflecting broad conviction that the currency faces structural headwinds.
Liquidity conditions are amplifying the moves. Japanese markets are closed for the rest of the week, and most global markets will shut on Thursday for the New Year’s Day holiday, leaving trading volumes exceptionally light.
Against that backdrop, the euro was steady at $1.1747, while sterling hovered around $1.3463 on the final trading day of the year. Both currencies are set to record their strongest annual gains in eight years. The dollar index, which measures the U.S. currency against six major peers, stood at 98.228 and has fallen about 9.5% in 2025. Over the same period, the euro has risen roughly 13.5% and the pound about 7.6%.
Strategists see little reason for a near-term reversal. Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities, said bearish dollar views remain “well-subscribed” for 2026, with investors favouring short dollar positions against currencies such as the euro and Australian dollar.
The dollar did find modest support earlier in the week after minutes from the Fed’s December meeting revealed deep divisions among policymakers over the pace of easing. While traders are pricing in two rate cuts in 2026, the Fed’s own projections point to just one, underscoring the uncertainty around the policy path.
Goldman Sachs strategists also expect the dollar to weaken further next year, citing resilient global growth and a policy divergence in which the Fed cuts rates while other major central banks hold steady. However, they cautioned that a sharper decline could materialise if concerns intensify around a U.S. labour-market downturn, deeper-than-expected rate cuts, or a significant re-rating of U.S. technology stocks.
The dollar’s slide has lifted a broad range of currencies, including those in emerging markets. China’s yuan this week broke through the key psychological level of seven per dollar for the first time in two and a half years, despite relatively cautious guidance from the central bank. The yuan is now on course for a roughly 4% annual gain, its strongest performance since 2020.
Yen Lags as Others Advance
One notable exception to the dollar-driven rally has been the Japanese yen. Despite two rate hikes by the Bank of Japan this year—one in January and another earlier this month—the yen has been broadly flat over 2025.
On Wednesday, it traded around 156.35 per dollar, drifting away from levels that previously sparked concerns about official intervention. Investors have grown frustrated with what they see as the Bank of Japan’s slow and cautious tightening approach, leading to a sharp reversal in long-yen positions that had built up earlier in the year.
Looking ahead, some analysts see scope for a turnaround. MUFG strategists said that as U.S. yields fall, conditions could emerge for a renewed strengthening of the yen, reviving its traditional safe-haven appeal. They forecast the currency could move to around 146 per dollar by the fourth quarter of 2026 if sentiment and momentum shift.
Elsewhere, risk-sensitive currencies have been among the standout performers. The Australian dollar last traded at $0.66965, putting it on track for an annual gain of more than 8%, its best year since 2020. The New Zealand dollar eased slightly to $0.57875 but is still set for a 3.4% rise, snapping a four-year losing streak.
As markets turn the page on 2025, the consensus view remains that the dollar’s challenges are far from over, setting the stage for continued volatility and shifting leadership in global currency markets in the year ahead.