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The US dollar is on track for its worst annual performance in over two decades, declining nearly 10% this year, driven by investor expectations of further Fed rate cuts next year. Despite strong US economic data, the market prices in about two potential rate cuts in 2026, with the first FOMC meeting scheduled for late January.
The dollar fell to a 10-week low against a basket of currencies, while the euro rose 14% this year, reaching a three-month high of $1.1806. The Australian and New Zealand dollars also gained, rising 8.4% and 4.5%, respectively, amid expectations of potential rate hikes in those regions.
Sterling reached a three-month high of $1.3531, bolstered by bets of a rate cut by the Bank of England in the first half of 2026. Meanwhile, Asian currencies like the Thai baht surged 10%, although concerns over the yen remain due to fears of Japanese intervention, after the Bank of Japan’s recent rate hike and comments from officials warning of possible currency market actions.
Analysts suggest the dollar’s weakness is partly due to concerns over Fed independence, with some experts attributing market movements to broader geopolitical and monetary policy uncertainties.