The U.S. dollar is set to close 2025 with its biggest annual decline since 2017, dropping 9.5% against a basket of major currencies. The broader currency landscape witnessed sharp rebalancing as the euro and British pound posted their strongest yearly gains in eight years, with the euro rising 13.5% and the pound surging 7.6%.
Major currency performances
The euro emerged as the top performer, propelled by improving economic sentiment in the Eurozone and expectations of a more accommodative Federal Reserve. The British pound also gained significantly as post-Brexit trade agreements and fiscal stability attracted capital inflows. The Chinese yuan broke through the psychologically important 7-per-dollar level, ending the year up about 4%, reflecting China's resilient economy and trade surplus. The Japanese yen remained an outlier, virtually flat despite two rate hikes by the Bank of Japan, as markets awaited clearer signals on inflation persistence.
What drove the dollar down?
Several factors contributed to the greenback's weakness: Federal Reserve rate-cut expectations – traders priced in more than 100 basis points of cuts over the year, narrowing the interest rate differential with other major economies. Fiscal worries – U.S. government debt surpassed $35 trillion, raising concerns over long-term sustainability. Political pressure – President Trump repeatedly called for lower rates and threatened currency intervention, undermining confidence in the dollar's stability.
Outlook for 2026: continued weakness or rebound?
Goldman Sachs strategists anticipate further dollar depreciation in 2026, citing solid global growth, expected Fed easing, and a shift toward risk-on assets. However, some analysts warn that the dollar could stage a temporary rebound if U.S. economic data surprise to the upside or geopolitical tensions flare up. The broader trend, however, suggests a gradual erosion of the dollar's safe-haven status – as economist Peter Schiff warned, the dollar may be approaching a dangerous breaking point. The global currency market is set for increased volatility in the year ahead.