The dollar climbed on Wednesday, erasing earlier losses following stronger-than-expected labor market data, yet it is still on track to record its largest annual decline since 2017 after a year marked by interest rate cuts, fiscal concerns, and uncertain trade policies under the Trump administration. These factors are expected to persist into 2026, suggesting the dollar's weakness could continue, impacting several major currencies including the euro and the pound, both of which have registered significant gains this year. The U.S. Labor Department stated on Wednesday that initial claims for state unemployment benefits fell by a seasonally adjusted 16,000 to 199,000 for the week ending December 27, the lowest level in a month, below the 220,000 forecast by economists in a survey. "Claims data is noisy, especially around the holidays, but it's still the best data for the health of the labor market," said Brian Jacobsen, Chief Economist at Annex Wealth Management. He added, "Perhaps the biggest surprise for the new year is that the labor market started to improve in December, meaning the Fed could keep rates on hold for longer than previously expected." The dollar index was up 0.27% on the day at 98.50; the euro fell 0.21% to $1.1721. For the full year, the dollar fell more than 9%, while the euro gained over 13%. Sterling fell 0.45% on the day to $1.3401 but has risen more than 7% against the dollar for the year. Pressure on the dollar this year also stemmed from market concerns about the Federal Reserve's independence under the Trump administration, with the President pushing for aggressive rate cuts. Trump has said he plans to announce his nominee for the next Fed Chair in January, to replace Jerome Powell, whose term ends in May and who has faced prolonged criticism from the President. However, some new voting members have recently expressed skepticism about further rate cuts. Minutes from the Fed's December 9-10 meeting revealed that policymakers agreed to cut rates only after an in-depth discussion of the current risks to the U.S. economy. New projections released after the meeting indicated the Fed expects only one more rate cut next year, while the wording of the policy statement suggested rates would likely be left on hold for some time, barring new data showing a renewed decline in inflation or a larger-than-expected rise in unemployment. Markets are currently pricing in approximately 50 basis points of rate cuts for next year. Other European currencies also posted substantial gains in 2025. The Swiss franc rose 14%, and the Swedish krona SEK= surged 20%. The yen was one of the few currencies in 2025 that did not benefit from the dollar's weakness, ending the year largely flat, despite the Bank of Japan having raised rates twice this year, once in January and again earlier this month.
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