US Dollar Ends Year with Major Decline

The US dollar wrapped up the year with its largest drop since 2017, impacted by turmoil within the Federal Reserve, trade disruptions, and overall economic uncertainty.

By year-end, the dollar had fallen about 8% against a collection of other currencies, as shown by the Bloomberg Dollar Spot Index.

This decline represents the most significant annual drop for the dollar in eight years.

Some metrics suggest the losses could even reach between 9% to 10%, following a dramatic first half of the year that erased gains made during a decade-long bullish trend for the currency.

The “Emancipation Day” tariffs implemented by President Trump in April unsettled global markets, prompting increased selling of the dollar amidst fears of long-term harm to U.S. economic growth.

Despite experiencing a slowdown, the dollar did not manage to bounce back completely. Its depreciation was compounded by persistently high inflation, which constrained the Federal Reserve’s options.

While core inflation hovers around 3%, expectations for consumer inflation surged during the summer, driven by the added pressures from tariffs.

Moreover, foreign investment sentiment has begun to shift. China has reduced its holdings of U.S. Treasuries to the lowest level since 2008, and global asset managers are increasing their hedging strategies against a weaker dollar, which reduces its demand.

Now, investors warn the decline isn’t done yet, particularly with the Fed anticipated to lower rates again in 2026, and with Trump advocating for a more dovish Fed governor.

“The Federal Reserve will be the leading factor affecting the dollar in the first quarter,” noted Yusuke Miyairi, a foreign exchange strategist with Nomura Securities. “It’s not just focused on the January and March meetings, but also on who will succeed Jerome Powell as Fed chair.”

Kevin Hassett, currently the director of the White House National Economic Council, is viewed as a likely candidate to step in when Powell’s term concludes in May.

Though Hassett is perceived to share the president’s economic philosophy, he has asserted that he would have “no influence” over Fed decisions, even if appointed.

Predictions for at least two interest rate cuts in the upcoming year have already been factored into the market, further diminishing the dollar’s yield appeal, especially as U.S. Treasury yields dropped from over 4.5% at the year’s beginning to close to 4.1% by December.

The dollar’s most challenging period was during the first half of 2025, experiencing the steepest six-month decline in over fifty years. A brief recovery in July quickly faded as worries about growth, politics, and trade resurfaced.

April’s tariff actions by Trump marked a pivotal moment — he employed emergency powers to establish a 10% tariff on nearly all imports and higher tariffs on countries with trade surpluses with the U.S.

This triggered a significant sell-off in global markets, with the S&P 500 index dropping more than 13% in less than a week, and the dollar suffered as investors sought safety.

Although the White House postponed some of the most severe tariffs shortly afterwards, many initial tariffs remained in effect, perpetuating uncertainty. Economists cautioned that these policies could inflate prices, suppress demand, and provoke retaliation.

As the year progressed, these concerns continued to hinder the dollar despite stock market recoveries.

By late summer, attention turned sharply toward the Federal Reserve.

After several months of keeping interest rates stable, Fed policymakers began cutting rates in response to increasing signs of labor market weaknesses.

Amid rising unemployment and a slowdown in payroll growth, the Fed reduced rates by a quarter percentage point twice, first in September and then in December, marking a stark shift from the earlier aggressive tightening that had previously boosted the dollar.

Traders quickly positioned themselves for more changes ahead. Futures markets are currently estimating at least one, possibly up to four, rate cuts in 2026.

The newspaper has reached out to both the White House and the Federal Reserve for official comments.