Awaiting a New Fed Chairman, the Dollar Becomes More Volatile
The US dollar index held relatively steady at 98.2 on the final trading day of 2025, but remained near its lowest level since early October. This movement confirms that the dollar is heading for its biggest annual decline since 2017.
Throughout 2025, the dollar fell around 9.4%. This weakening reflects a turbulent year, fueled in part by President Donald Trump's launch of global tariffs, which fueled market uncertainty.
Another major factor comes from market expectations that the Federal Reserve (Fed) will continue to cut interest rates. When US interest rates potentially fall, the dollar's appeal weakens because its yield becomes less competitive.
Furthermore, the interest rate differential between the US and other major currencies has also narrowed. This gives investors less reason to hold the dollar compared to other major currencies.
The dollar is also weighed down by concerns about the US fiscal deficit, which is increasingly under market scrutiny. On the other hand, investor concern has also emerged over the issue of the Fed's independence, which has added to the pressure on dollar sentiment.
Investors are now awaiting a key development: the appointment of a new Fed Chair. Trump is expected to announce Jerome Powell's replacement early next year, and the market is assessing the choice could influence the future direction of US monetary policy.
The minutes of the Fed's December meeting showed that a majority of officials believe additional interest rate cuts are appropriate if inflation continues to fall, although they remain divided on the timing and depth of the cuts. Currently, the market is still pricing in two 25-bps cuts by 2026.
Key points:
- The dollar index held at 98.2, near its lowest level since early October.
- The dollar is headed for its biggest annual decline since 2017 (around -9.4% in 2025).
- Sentiment has been shaken since Trump's global tariffs fueled uncertainty.
- Expectations of a Fed rate cut plus narrowing global interest rate spreads are weighing on the dollar.
- Concerns about the fiscal deficit and the issue of the Fed's independence are also weakening sentiment.
- The market is awaiting the announcement of Jerome Powell's replacement early next year.
- Market pricing: Two 25 bps cuts in 2026 remains the main scenario. (asd)
Source: Newsmaker.id
