Dollar Rebounds, But 2025 Remains in the Red
The US dollar strengthened on Wednesday after initially weakening following the release of stronger-than-expected labor market data. While this daily rebound has helped sentiment, the dollar is still predicted to end 2025 with its deepest annual decline since 2017—pressured by a series of interest rate cuts, fiscal concerns, and the perceived inconsistent direction of US trade policy under President Donald Trump.
These factors are expected to continue to overshadow foreign exchange market movements in 2026. If pressure persists, dollar weakness could potentially provide room for other currencies such as the euro and the pound sterling, which recorded significant gains throughout 2025.
The US Department of Labor reported that weekly initial jobless claims fell by 16,000 to 199,000 (seasonally adjusted), the lowest level in a month and below the Reuters consensus economists' projection of 220,000. Following the release of this data, the dollar index (DXY) rose 0.27% to 98.50. The euro fell 0.21% to $1.1721. Year-to-date, the dollar has fallen more than 9% while the euro has strengthened more than 13%. The pound sterling weakened 0.45% to $1.3401 on the same day, but still has a gain of more than 7% against the dollar through 2025.
Additional pressure on the dollar comes from the question of the independence of the Federal Reserve under Trump, amidst his push for aggressive interest rate cuts. Trump said he would announce his next Fed chair around January, replacing Jerome Powell, whose term ends in May and has been the target of frequent criticism. Meanwhile, some new voting members for next year have begun to express doubts about the continuation of interest rate cuts.
The minutes of the Fed's December 9-10 meeting showed the decision to cut interest rates was reached after a very careful discussion of risks to the US economy. The latest projections following the December meeting indicate the Fed expects only one rate cut in 2026, with a signal that rates could be held on hold until there is evidence of inflation returning to a steady decline or unemployment rising higher than expected. Despite this, the market is still pricing in expectations of a 50 basis point cut next year.
This situation has led many Wall Street market participants to predict the dollar will likely continue to weaken in 2026, although there are other views, such as Societe Generale's chief FX strategist, Kit Juckes, who believes the final phase of the dollar's decline may already be underway. In Europe, other currencies also performed strongly throughout 2025: the Swiss franc rose 14% and the Swedish krona soared 20%.
Meanwhile, the Japanese yen is among those that have not benefited much from the dollar's weakness throughout 2025. The yen has remained stable despite the Bank of Japan raising interest rates twice—in January and earlier this month. On Wednesday, the yen weakened 0.34% to 156.96 per dollar, still near the level that has repeatedly triggered statements of support for the yen from Tokyo officials and rekindled speculation of potential intervention.
Source: Newsmaker.id
