US Dollar's 2025 Slide: Economic Uncertainties and Global Currency Gains

The U.S. dollar faced its biggest annual drop since 2017, influenced by interest rate cuts, fiscal concerns, and erratic trade policies. As 2026 begins, the dollar's performance is expected to remain weak, benefiting currencies like the euro, sterling, and the Swiss franc.

The U.S. dollar slightly increased on Wednesday, yet it was headed for its most significant annual decline since 2017. This outcome is largely due to interest rate cuts, fiscal concerns, and erratic U.S. trade policies under President Donald Trump's administration, affecting currency markets in 2025. These factors are anticipated to continue into 2026, suggesting that the dollar's weak performance could persist, favoring currencies such as the euro and sterling, which have experienced significant gains this year.

Additionally, the dollar's challenges are compounded by concerns regarding the Federal Reserve's independence under Trump's leadership. The president is expected to announce his candidate for the next Federal Reserve chair in January, replacing Jerome Powell, who has faced ongoing criticism. As a consequence, the "sell-dollar" sentiment has remained strong, with net-short positions since April, according to Commodity Futures Trading Commission data.

While the dollar struggled, other currencies, including China's yuan and the Australian dollar, saw impressive performances. The yen remained stagnant despite monetary tightening by the Bank of Japan. Analysts suggest the dollar-yen pair could eventually retrace, with U.S. yield movements potentially revitalizing the yen's safe-haven status. Bitcoin also concluded the year lower, marking its first annual decline since 2022.

(With inputs from agencies.)