The US currency is heading for its steepest yearly decline in eight years, with market participants anticipating further weakness if the incoming Federal Reserve chair pursues more aggressive interest-rate reductions as widely expected.
The Bloomberg Dollar Spot Index has dropped approximately 8% year-to-date. Following its slide after Donald Trump’s “Liberation Day” tariffs in April, the currency faced continued downward pressure as the president launched an assertive effort to install a dovish nominee as Fed chair for the coming year.
“The primary driver for the dollar in the first quarter will be the Federal Reserve,” commented Yusuke Miyairi, foreign-exchange strategist at Nomura. “The key isn’t just the January and March meetings, but who succeeds Jerome Powell when his term concludes.”
With markets already pricing in at least two rate cuts for the upcoming year, the US monetary policy trajectory is diverging from several other developed nations, further eroding the dollar’s attractiveness.
The euro has strengthened significantly against the dollar as subdued inflation and anticipated European defense expenditures keep expectations for rate cuts minimal. Meanwhile, in Canada, Sweden, and Australia, interest-rate traders are betting on policy tightening.
The dollar index advanced as much as 0.2% on Wednesday after Labor Department figures indicated US unemployment benefit claims declined last week to one of the levels this year. The currency benchmark remained headed for a December decline of roughly 1%.
This month, a short-lived wave of optimistic dollar positioning shifted back to the bearish outlook that has prevailed since April’s tariffs sparked worries about the US economy, according to Commodity Futures Trading Commission data for the week ending December 16.
For the time being, market focus remains squarely on the Fed and who will succeed Jerome Powell, whose chairmanship is scheduled to conclude in May.
Trump recently hinted that he has a candidate in mind, but is not rushing to make a formal announcement—while also suggesting he might dismiss the central bank’s current head.
National Economic Council Director Kevin Hassett has long been viewed as the frontrunner, though Trump has also shown interest in former Fed governor Kevin Warsh. Fed governors Christopher Waller and Michelle Bowman, along with BlackRock’s Rick Rieder, are also considered contenders.
“Hassett is more or less already reflected in market prices given his longstanding position as frontrunner, whereas Warsh or Waller would probably be less aggressive in cutting rates, which would support the dollar,” noted Andrew Hazlett, foreign-exchange trader at Monex Inc.