The dollar steadied on Tuesday ahead of the release of the December meeting minutes from the Federal Reserve, while the Chinese yuan extended its gains and broke above a key psychological level against the US currency.
Year-end holidays continued to drain liquidity from markets, as traders increasingly expect the dollar to remain under pressure.
The dollar is on track to post its worst annual performance since 2017, with losses approaching 10%.
Some analysts said the December Fed minutes, when the central bank cut interest rates, could reinforce expectations for further monetary easing, as markets have already priced in two additional rate cuts in 2026.
Euro and sterling on track for annual gains
The euro was trading at $1.1767, heading for annual gains of around 14%, while sterling stood at $1.3508, on course to rise by about 8% in 2025.
The dollar index, which measures the US currency against a basket of major peers, is set to record an annual decline of 9.6%, its steepest drop in eight years. The weakness has been driven by expectations of Fed rate cuts, narrowing interest-rate differentials with other currencies, as well as concerns over the US budget deficit and political uncertainty.
The index was last at 98.03 points, not far from the three-month low hit last week.
Strategists at MUFG expect the dollar index to fall by a further 5% next year, citing US economic performance and the direction of monetary policy as the key drivers.
Others, however, pointed to the dollar’s relative stability in recent months and the limited scope for the Fed to deliver much deeper rate cuts.
Guy Miller, chief market strategist at Zurich Insurance Group, said: “We think the dollar will trade in a range around current levels against the major currencies. We’ve largely been moving sideways since the summer, particularly against the Swiss franc and the euro.”
Yuan breaks a key psychological level
China’s onshore yuan broke above the psychologically important 7-per-dollar level for the first time in two and a half years, defying weaker guidance from the central bank as exporters rushed to sell dollars toward year-end.
The yuan strengthened to 6.9951 per dollar, its strongest level since May 2023. It has risen by around 5% against the weakening dollar since early April and is set to end a three-year losing streak.
The People’s Bank of China had sought to curb sharp yuan appreciation by setting weaker daily fixings and issuing verbal warnings through state media, but those efforts failed to reverse the currency’s upward momentum.
Japanese yen and the economy
Meanwhile, the Japanese yen was trading at 155.96 per dollar, slightly away from levels that previously prompted verbal warnings from Tokyo officials and fueled market speculation about possible intervention.
A summary of opinions from Bank of Japan policymakers, released on Monday, showed officials discussing the need to continue raising interest rates even after the hike approved in December, with one member calling for rate increases every few months, highlighting the bank’s focus on inflationary pressures.
Kit Juckes, chief foreign exchange strategist at Société Générale, said movements in dollar/yen are more closely tied to growth expectations than to monetary policy. “What the yen needs, above all else, is stronger GDP growth,” he said.
The Japanese government said last week it expects the economy to grow by 1.1% in the fiscal year ending in March, up from a previous estimate of 0.7% in August, citing a smaller-than-expected impact from US tariffs.
Growth is also forecast to accelerate to 1.3% in the following fiscal year, supported by solid consumption and capital spending, offsetting weaker external demand, according to official projections.
