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The US dollar is set for its most significant annual decline since 2017, currently on the backfoot as market sentiment points towards an interest rate cut by the Federal Reserve next year.
This outlook holds despite strong US GDP data released on Tuesday, which failed to change investors’ expectations for monetary policy.
Analysts are now forecasting about two additional Fed rate cuts in 2026.
Commenting on the situation, David Mericle, chief US economist at Goldman Sachs, said: “We expect the FOMC to settle on two more 25 bp cuts to 3-3.25 per cent, but risks remain to the downside. He attributed this forecast to slower inflation.
The euro and pound each hit new three-month highs on Wednesday, although they were broadly steady on the day at $1.180 and $1.3522, respectively.
Against a basket of currencies, the dollar index =USD fell to a 2-1/2-month low of 97.767.
It was on track to lose 9.8 percent for the year, which would be its biggest annual decline since 2017. Any further weakness in the final week of the year would take it to its biggest decline since 2003.
Slammed by President, it’s been a turbulent year for the dollar Donald Trump’s chaotic Tariff This led to a crisis of confidence in US assets earlier this year, even as it was growing Effect The Fed has also expressed concern about its independence.
In contrast, the euro is up just over 14 percent so far this year, putting it on track for its best performance since 2003.
european central bank stood patting on rates last week and revised upward some of its growth and inflation projections, a move that likely opens the door to further easing in the near term.
Traders have since reacted to the pricing with a low likelihood of policy tightening next year, reflecting expectations. Australia and New Zealand, where the next steps are seen as walking steps.
That in turn has led to a surge in the two Antipodean currencies, with the Australian dollar AUD= , up 8.4 percent so far, hitting a three-month peak of $0.6710 on Wednesday, and the New Zealand dollar NZD= similarly hitting a 2-1/2-month high of $0.58475.
Sterling GBP= is up more than 8 percent for the year. investors are betting Bank of England There will be at least one rate cut in the first half of 2026, and a near 50 percent chance of a second before the end of the year.
However, most currencies have declined significantly against precious metals such as gold, which hit a new record high on Wednesday.
The currencies of smaller European countries, which often have less debt, have been among the best performers this year.
The dollar declined 12 percent on the Norwegian crown, 13 percent on the Swiss franc – last trading at 0.7865 francs – and 17 percent on the Swedish crown, hitting 9.167 crowns on Wednesday, the lowest since the start of 2022.
Traders on yen intervention warning
At the moment, the main focus of the Forex market remains on the Japanese Yen, with traders alert to the possibility of intervention by Japanese authorities to stop the currency’s decline.
Finance Minister Satsuki Katayama said on Tuesday that Japan has… free hands Issuing its strongest warning yet on Tokyo’s readiness to intervene, dealing with excessive yen moves.
His comments halted the yen’s decline, with the dollar falling 0.3 percent to 155.83 yen on Wednesday, the Japanese currency JPY= , having dropped 0.5 percent in the previous session.
While the Bank of Japan gave its long-awaited results rate increase Last Friday, the move was well-publicized and Governor Kazuo Ueda’s comments disappointed some in the market who were betting on a more hawkish tone except the yen. report in the aftermath.
That has made investors wary of official yen-buying from Tokyo, especially as trading volumes loom near the end of the year, which analysts say would be an opportune time for the authorities to strike.