The US dollar is experiencing its steepest decline in nearly a decade, driven by Federal Reserve divisions and expectations of rate cuts as 2026 approaches.
The US dollar is closing out the year with its sharpest decline in nearly a decade, and analysts suggest that this downward trend may continue into 2026. The Bloomberg Dollar Spot Index has fallen by 8.1% in 2025, marking its worst annual performance in eight years.
This decline accelerated following President Donald Trump’s announcement of sweeping tariffs in April, an event he referred to as “Liberation Day.” This move unsettled currency markets and triggered a sustained selloff of the dollar.
Since that announcement, the dollar has remained under pressure as investors reassess US trade policy, economic growth prospects, and global demand for dollar-denominated assets. With these concerns still prevalent, analysts predict that the currency could face further weakness as the new year approaches.
Uncertainty surrounding the Federal Reserve has also contributed to the dollar’s struggles. Trump has indicated that he desires a more flexible Fed chair to be appointed next year, which has added to the pressure on the dollar.
Yusuke Miyairi, a foreign exchange market analyst at Nomura, stated that the central bank will be a key driver for the currency in early 2026. “The biggest factor for the dollar in the first quarter will be the Fed,” he noted, emphasizing that the focus will not only be on the meetings scheduled for January and March but also on who will succeed Jerome Powell as Fed Chair when his term ends in May.
Market expectations are now factoring in at least two interest rate cuts in the US next year. This outlook risks putting American monetary policy out of sync with several other advanced economies, making the dollar less attractive to global investors seeking higher returns.
The euro has already begun to gain ground against the dollar, as inflation in Europe remains relatively contained. Additionally, expectations of increased defense spending are bolstering growth prospects in the region, leading investors to anticipate little chance of rate cuts in the near term.
In contrast, traders in Canada, Sweden, and Australia are positioning for possible rate hikes, highlighting how divergent the US policy path could become compared to its peers.
As the market closely monitors the Federal Reserve, speculation continues regarding who will take over from Jerome Powell. Trump has hinted that he has made a decision regarding the next Fed chair but has not disclosed the name. He has also suggested the possibility of removing Powell before the end of his term, further complicating the outlook for the dollar.
Kevin Hassett, who leads the National Economic Council, is widely regarded as the frontrunner for the Fed position. Trump has also mentioned Kevin Warsh, a former Fed governor, while other potential candidates include current Fed governors Christopher Waller and Michelle Bowman, as well as Rick Rieder from BlackRock.
Andrew Hazlett, a foreign currency trader at Monex Inc., commented, “Hassett would be more or less priced in since he has been the frontrunner for some time now, but Warsh or Waller would likely not be as quick to cut, which would be better for the dollar.”
Federal Reserve officials remain divided over the timing of the next rate cuts. Some members see room for additional reductions if inflation continues to ease, while others advocate for maintaining rates at their current levels for a longer period. These differing viewpoints were highlighted in meeting records released recently.
In December, the Fed voted 9-3 to lower its key rate by a quarter point, marking the third consecutive reduction. The benchmark rate now stands between 3.5% and 3.75%, as previously reported by Cryptopolitan.
As the new year approaches, the outlook for the dollar remains uncertain, with many factors at play that could influence its trajectory in 2026.