The U.S. dollar faced a "Waterloo moment" in 2025. The U.S. Dollar Index (DXY), which measures the greenback against a basket of major currencies, plunged about 9% this year, marking its worst annual performance since 2017. As of December 23, the index fell below 98, hitting a five-day low.
Market expectations of continued Fed rate cuts, rapidly narrowing yield differentials between the U.S. and other major economies, and concerns over America’s massive fiscal deficit and political uncertainty collectively drove the dollar’s decline this year.
Looking ahead to 2026, pessimism persists. Multiple institutions predict the DXY downtrend will continue. A Bloomberg survey shows over six major investment banks broadly expect further weakness against the euro, yen, and pound, with the index potentially dropping another 3% by end-2026.
**Key Drivers** In H1 2025, the DXY tumbled 10.8%, its steepest first-half drop since 1973. Despite a partial rebound, overall momentum remained weak. U.S. tariff hikes on global trade partners significantly contributed to the dollar’s H1 slump, while fading "American exceptionalism" eroded its traditional support.
Monetary policy accelerated the decline. The Fed’s consecutive 2025 rate cuts—including a third cut on December 10—sent the index down 0.43% that day, its worst single-day performance in nearly three months. Persistent easing expectations notably reduced dollar-denominated assets’ appeal.
Domestic challenges intensified. Record U.S. fiscal deficits and government debt triggered rating downgrades, undermining confidence in the dollar’s stability as sovereign credit weakened. Political risks also clouded Fed independence, with potential dovish leadership changes in 2026 fueling fears of aggressive easing.
**Non-USD Currencies Shine** As the dollar weakened, rival currencies rallied. The euro gained ~14% against USD, while the Swiss franc and Swedish krona rose 14.5% and 19%, respectively. Emerging market currencies also outperformed. Gold, the traditional haven, surged nearly 68% this year as central banks globally accelerated bullion purchases.
**2026 Outlook: More Pain Ahead** While technical rebounds are possible, most analysts argue structural dollar weakness is irreversible.
Invesco Asia-Pacific strategist David Chao noted the trade-weighted dollar remains overvalued, making 2026 depreciation "predictable," primarily due to global rate divergence. He expects deeper Fed cuts versus other central banks—like the BoJ’s projected two hikes—further pressuring USD. Meanwhile, the ECB may hold or tighten policy, widening yield gaps and spurring capital outflows.
Fed leadership changes add dovish risks, with Trump-backed candidates likely favoring lower rates. Corpay’s Karl Schamotta emphasized the dollar’s persistent overvaluation—October’s real broad effective exchange rate at 108.7, just below January’s 115.1 peak—leaves room for further declines, especially amid Fed easing cycles.
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