The US dollar is heading for its worst performance in nearly a decade. Market experts believe further weakness is coming, and that will ultimately depend on who is in charge of running the Federal Reserve.
The Bloomberg Dollar Spot Index has fallen 8.1% since the beginning of the year. This is the largest annual decline in the past eight years. The dollar plummeted after President Donald Trump imposed tariffs in April on what he called “Liberation Day” and has been under pressure ever since.
President Trump is pushing for a more lenient Fed chair to take office next year, which is pushing back the currency.
Yusuke Miyairi analyzes Nomura’s foreign exchange market. “The biggest factor for the dollar in the first quarter will be the Fed,” he said, adding, “It’s not just the January and March meetings that will be important, but who will become the Fed chairman after Jerome Powell’s term ends.”
The market is betting on at least two rate cuts next year. That has left U.S. monetary policy out of step with some other rich countries, making the dollar less attractive to investors.
European currencies are rising against the dollar. The country’s inflation remains at manageable levels, and a wave of military spending is looming. As a result, expectations for interest rate cuts remain close to zero. It’s a different story in Canada, Sweden and Australia. Traders are actually betting on interest rates rising in these countries.
The Commodity Futures Trading Commission releases data on currency positioning. The week ending December 16th showed something interesting. There was a brief moment this month when people became bullish on the dollar again. It didn’t last long. It’s back to the pessimism that’s been in place since April’s tariffs got everyone worried about the U.S. economy.
All eyes are on Powell’s successor
For now, it all depends on the Fed and who replaces Jerome Powell. His term as chairman ends in May.
President Trump has recently hinted that he has chosen someone, but he has not yet revealed who. He has also floated the idea of firing the current Fed leadership before the end of his term.
Kevin Hassett runs the National Economic Council. He has been considered the frontrunner for some time now. Trump also mentioned former Federal Reserve Board member Kevin Warsh. Next up are Fed directors Christopher Waller and Michelle Bowman. Rick Reeder from BlackRock is also participating.
Andrew Hazlett trades foreign currencies at Monex Securities. “Mr. Hassett has been the frontrunner for some time now, so it’s more or less priced in, but Mr. Warsh and Mr. Waller are unlikely to cut rates as quickly, which is better for the dollar.”
Fed officials are divided on their next move.
Fed officials appear unable to agree on when to lower borrowing costs again. Most believe further rate cuts are possible if inflation continues to slow. However, several officials want to keep interest rates where they are for some time. This was revealed in the meeting records released on Tuesday.
Minutes from the Fed’s Dec. 9-10 meeting showed that disagreements have not been resolved, as previously reported by Cryptopolitan. A majority supported last month’s further rate cut, but it was not an easy decision for everyone.
The Federal Reserve voted 9-3 in December to cut its key policy interest rate by a quarter of a percentage point. This is 3 consecutive cuts. As previously reported by Cryptopolitan, that rate is between 3.5% and 3.75%.
“Several people who supported lowering the policy rate at this meeting expressed the view that the decision was delicately balanced, or that they could have supported leaving the target range unchanged,” the minutes read.
Officials revised their statement after the meeting. The new version showed they were less certain about when future cuts would occur. Their interim forecast was for a decline of just a quarter point in 2026. However, individual predictions were mixed. Market players are banking on at least two rate cuts next year.
