Dollar Slides Toward Biggest Annual Drop Since 2017
The U.S. dollar faced challenges on Wednesday, poised for its largest annual decline since 2017, with the potential for additional losses ahead. This comes as investors anticipate that the Federal Reserve may have the capacity to lower rates further next year, while many of its counterparts appear to have concluded their easing measures. Tuesday’s robust U.S. GDP reading did not significantly alter the rate outlook, resulting in investors anticipating approximately two additional Fed cuts in 2026. “We anticipate the FOMC will agree on two additional 25 bp reductions to a range of 3-3.25%, although we perceive the risks as leaning towards a downward trajectory,” stated David Mericle.
The euro and pound each edged up to new three-month highs on Wednesday, though they remained largely stable for the day at $1.180 and $1.3522, respectively. The dollar index declined to a 2-1/2-month low of 97.767 against a basket of currencies. The projection indicated a potential decline of 9.8% for the year, signifying the most significant annual decrease since 2017. Any additional decline in the final week of the year would mark its most significant drop since 2003.
The dollar has experienced significant volatility this year, influenced by President Donald Trump’s unpredictable tariffs that triggered a crisis of confidence in U.S. assets earlier in the year. Additionally, his increasing sway over the Federal Reserve has led to worries regarding its autonomy. The euro has increased by just over 14% year-to-date, positioning it for its strongest performance since 2003. The European Central Bank maintained its current interest rates last week and adjusted some of its growth and inflation forecasts upwards, a decision that likely signals a halt to any further easing in the near future. Market participants have reacted by incorporating a modest likelihood of stricter monetary policy in the upcoming year, reflecting similar sentiments for Australia and New Zealand, where anticipated actions are viewed as rate increases.
The two Antipodean currencies have experienced a notable rise, with the Australian dollar appreciating 8.4% year-to-date, reaching a three-month peak of $0.6710 on Wednesday. Meanwhile, the New Zealand dollar has also reached a 2-1/2-month high of $0.58475. Sterling has appreciated over 8% year-to-date. Market participants are anticipating that the Bank of England will implement at least one rate reduction in the first half of 2026, assigning approximately a 50% probability to a second cut before the end of the year. Nonetheless, a considerable number of currencies have experienced substantial declines against precious metals like gold, which reached a new all-time high on Wednesday. This year, currencies from smaller European nations, typically characterized by low debt levels, have emerged as some of the top performers. The current emphasis in the foreign exchange market is on the Japanese yen, as traders remain vigilant regarding the potential for intervention by Japanese authorities to halt the currency’s decline.
