The US dollar fell on Wednesday and was on track to record its largest annual loss since 2017, with scope for further declines, as investors bet that the Federal Reserve will have room to cut interest rates more aggressively next year, while most other major central banks are seen as having largely завершed their easing cycles.
Strong US gross domestic product data released on Tuesday failed to alter interest-rate expectations, with investors continuing to price in around two additional rate cuts by the Federal Reserve in 2026.
David Mericle, chief US economist at Goldman Sachs, said: “We expect the Federal Open Market Committee to converge on two additional 25-basis-point cuts, bringing rates to a 3%–3.25% range, but we see risks skewed toward even more easing,” citing slowing inflation.
Both the euro and the British pound edged up to three-month highs on Wednesday before settling later near $1.180 for the euro and $1.3522 for sterling.
Against a basket of currencies, the dollar index slipped to a two-and-a-half-month low of 97.767 points. The index is on course to post an annual loss of 9.8%, its steepest yearly decline since 2017. Any further weakness in the final week of the year could push it toward its biggest annual drop since 2003.
The dollar has endured a turbulent year, heavily affected by the chaotic tariffs imposed by US President Donald Trump, which earlier in the year triggered a confidence shock toward US assets. His growing influence over the Federal Reserve also raised concerns about the central bank’s independence.
In contrast, the euro has risen more than 14% since the start of the year, putting it on track for its strongest annual performance since 2003.
The European Central Bank kept interest rates unchanged last week and raised some of its growth and inflation forecasts, a move widely seen as closing the door to further near-term monetary easing.
Market participants responded by pricing in a slim chance of policy tightening next year, a view mirrored in Australia and New Zealand, where the next move is increasingly seen as a rate hike.
That outlook supported both the Australian and New Zealand dollars. The Australian dollar has risen 8.4% year-to-date and touched a three-month high of $0.6710 on Wednesday, while the New Zealand dollar reached a two-and-a-half-month high of $0.58475.
Sterling has gained more than 8% this year. Investors are betting that the Bank of England will deliver at least one rate cut in the first half of 2026, with markets pricing roughly a 50% chance of a second cut before year-end.
Even so, most currencies have lost significant ground relative to precious metals, led by gold, which hit a fresh record high on Wednesday.
Some smaller European currencies, often associated with low debt levels, were among the best performers this year.
The dollar has fallen 12% against the Norwegian krone, 13% versus the Swiss franc — trading at 0.7865 francs — and 17% against the Swedish krona, hitting its lowest level since early 2022 at 9.167 kronor on Wednesday.
Traders watch for possible Japanese intervention to support the yen
The Japanese yen remains the central focus in foreign exchange markets, with traders on alert for possible intervention by Japanese authorities to halt the currency’s decline.
Japanese Finance Minister Satsuki Katayama said on Tuesday that Japan has full freedom to respond to excessive moves in the yen, issuing the strongest warning yet of Tokyo’s readiness to intervene in markets.
Her comments helped halt the yen’s slide, with the dollar falling 0.3% against the Japanese currency to 155.83 yen on Wednesday, after a 0.5% drop in the previous session.
Although the Bank of Japan finally delivered a long-anticipated rate hike last Friday, the move was largely expected, and comments from Governor Kazuo Ueda disappointed some traders who had hoped for a more hawkish tone, leaving the yen under pressure after the decision.
As a result, investors remain on guard for potential yen-buying intervention by Japanese authorities, especially as trading volumes thin toward year-end — a backdrop that analysts say could offer a favorable window for official action.
