The US dollar fell on Wednesday and was on track to record its largest annual loss since 2017, with scope for further declines, as investors bet that the Federal Reserve will have room to cut interest rates more aggressively next year, while most other major central banks are seen as having largely завершed their easing cycles.

Strong US gross domestic product data released on Tuesday failed to alter interest-rate expectations, with investors continuing to price in around two additional rate cuts by the Federal Reserve in 2026.

David Mericle, chief US economist at Goldman Sachs, said: “We expect the Federal Open Market Committee to converge on two additional 25-basis-point cuts, bringing rates to a 3%–3.25% range, but we see risks skewed toward even more easing,” citing slowing inflation.

Both the euro and the British pound edged up to three-month highs on Wednesday before settling later near $1.180 for the euro and $1.3522 for sterling.

Against a basket of currencies, the dollar index slipped to a two-and-a-half-month low of 97.767 points. The index is on course to post an annual loss of 9.8%, its steepest yearly decline since 2017. Any further weakness in the final week of the year could push it toward its biggest annual drop since 2003.

The dollar has endured a turbulent year, heavily affected by the chaotic tariffs imposed by US President Donald Trump, which earlier in the year triggered a confidence shock toward US assets. His growing influence over the Federal Reserve also raised concerns about the central bank’s independence.

In contrast, the euro has risen more than 14% since the start of the year, putting it on track for its strongest annual performance since 2003.

The European Central Bank kept interest rates unchanged last week and raised some of its growth and inflation forecasts, a move widely seen as closing the door to further near-term monetary easing.

Market participants responded by pricing in a slim chance of policy tightening next year, a view mirrored in Australia and New Zealand, where the next move is increasingly seen as a rate hike.

That outlook supported both the Australian and New Zealand dollars. The Australian dollar has risen 8.4% year-to-date and touched a three-month high of $0.6710 on Wednesday, while the New Zealand dollar reached a two-and-a-half-month high of $0.58475.

Sterling has gained more than 8% this year. Investors are betting that the Bank of England will deliver at least one rate cut in the first half of 2026, with markets pricing roughly a 50% chance of a second cut before year-end.

Even so, most currencies have lost significant ground relative to precious metals, led by gold, which hit a fresh record high on Wednesday.

Some smaller European currencies, often associated with low debt levels, were among the best performers this year.

The dollar has fallen 12% against the Norwegian krone, 13% versus the Swiss franc — trading at 0.7865 francs — and 17% against the Swedish krona, hitting its lowest level since early 2022 at 9.167 kronor on Wednesday.

Traders watch for possible Japanese intervention to support the yen

The Japanese yen remains the central focus in foreign exchange markets, with traders on alert for possible intervention by Japanese authorities to halt the currency’s decline.

Japanese Finance Minister Satsuki Katayama said on Tuesday that Japan has full freedom to respond to excessive moves in the yen, issuing the strongest warning yet of Tokyo’s readiness to intervene in markets.

Her comments helped halt the yen’s slide, with the dollar falling 0.3% against the Japanese currency to 155.83 yen on Wednesday, after a 0.5% drop in the previous session.

Although the Bank of Japan finally delivered a long-anticipated rate hike last Friday, the move was largely expected, and comments from Governor Kazuo Ueda disappointed some traders who had hoped for a more hawkish tone, leaving the yen under pressure after the decision.

As a result, investors remain on guard for potential yen-buying intervention by Japanese authorities, especially as trading volumes thin toward year-end — a backdrop that analysts say could offer a favorable window for official action.

Gold prices rose in European trading on Wednesday, extending gains for a fourth consecutive session and continuing to shatter record highs, after breaking above the $4,500-per-ounce level for the first time in history. The move was driven by strong investment demand for the precious metal, supported by continued declines in the US dollar in the foreign exchange market.

These developments come amid rising expectations that the Federal Reserve will cut US interest rates twice next year. To reprice those expectations, investors are later today awaiting US third-quarter economic growth data.

Price overview

• Gold prices today: Gold rose about 0.95% to $4,525.96 per ounce, an all-time high, from an opening level of $4,484.25, after touching a low of $4,467.84.

• At settlement on Tuesday, gold prices gained 0.9%, marking a third consecutive daily increase.

The US dollar

The US dollar index fell 0.1% on Wednesday, extending its losses for a third straight session and hitting a two-and-a-half-month low, reflecting continued weakness in the US currency against a basket of major and secondary currencies.

As is well known, a weaker US dollar makes dollar-priced gold bullion more attractive to buyers holding other currencies.

These losses come amid active selling of the dollar ahead of the Christmas and New Year holidays, and under pressure from cautious comments by some Federal Reserve officials, which highlighted growing concerns about weakness in the US labor market.

Eric Bregar, head of FX and precious metals risk management at Silver Gold Bull in Toronto, said the US dollar could decline next year, at least in the first quarter, as the Federal Reserve will increasingly be forced to acknowledge that the labor market is not in good shape.

Bregar added that the Fed may be compelled to make greater concessions on interest rate cuts, and at a faster pace than it has so far, noting that markets want rate cuts and that expectations are building for a new, more dovish Federal Reserve chair who would seek to deliver that outcome.

US interest rates

• According to the CME FedWatch tool, pricing for keeping US interest rates unchanged at the January 2026 meeting stands at 87%, while the probability of a 25-basis-point rate cut is priced at 13%.

• Investors are currently pricing two US rate cuts over the course of next year, while the Federal Reserve’s own projections point to just one 25-basis-point cut.

• To reprice these expectations, investors are closely monitoring further US economic data releases, along with comments from Federal Reserve officials.

Gold outlook

Analysts at Mitsubishi said that with precious metals hitting record prices at this late point in the year — a time when one would usually be writing a Christmas card or two — the key takeaway may be that investors have not treated the holiday period as an opportunity to take profits.

Zain Vawda, market analyst at OANDA’s MarketPulse, said that bets on interest rate cuts have increased following the latest US inflation and labor market data, which is supporting demand for precious metals.

Vawda added that demand for safe-haven assets is also expected to remain strong amid tensions in the Middle East, uncertainty over reaching a peace agreement between Russia and Ukraine, and recent US actions against Venezuelan oil tankers.

SPDR fund

Gold holdings at the SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, were unchanged on Tuesday, leaving total holdings steady at 1,054.56 metric tons, the highest level since June 23, 2022.

The euro rose in European trading on Wednesday against a basket of global currencies, extending its gains for a third consecutive session against the US dollar and hitting a three-month high. The move was supported by continued selling of the US currency in the foreign exchange market ahead of the Christmas holiday period.

The single currency has also been buoyed by declining expectations that the European Central Bank will cut interest rates in February 2026, particularly amid improving economic activity in the euro area in recent weeks, alongside expectations that this improvement will continue as downside risks ease.

Price Overview

• Euro exchange rate today: The euro rose about 0.15% against the dollar to $1.1808, its highest level since September 25, from an opening level of $1.1794, after touching an intraday low of $1.1786.

• The euro ended Tuesday’s session up 0.3% against the dollar, marking a second consecutive daily gain, amid hopes that the European Central Bank will keep interest rates unchanged for as long as possible in 2026.

The US dollar

The US dollar index fell 0.1% on Wednesday, extending its losses for a third straight session and hitting a two-and-a-half-month low, reflecting continued weakness in the US currency against a basket of major and secondary currencies.

These losses come amid active selling of the dollar ahead of the Christmas and New Year holidays, and under pressure from cautious comments by some Federal Reserve officials, which highlighted growing concerns about weakness in the US labor market.

Eric Bregar, head of FX and precious metals risk management at Silver Gold Bull in Toronto, said that the US dollar could weaken next year, at least in the first quarter, as the Federal Reserve will increasingly be forced to acknowledge that the labor market is not in good shape.

Bregar added that the Fed may be compelled to make greater concessions on interest rate cuts than it has so far, noting that markets want lower rates and that expectations are building for a new, more dovish Federal Reserve chair who would seek to deliver that outcome.

European interest rates

• Money market pricing for a 25-basis-point rate cut by the European Central Bank in February 2026 remains below 10%.

• To prompt a repricing of these expectations, investors are awaiting further economic data from the euro area, including inflation, unemployment, and wage figures.

Interest rate differential

Following the Federal Reserve’s latest decision, the interest rate gap between Europe and the United States narrowed to 160 basis points in favor of US rates, the smallest differential since May 2022, which supports further gains in the euro against the US dollar.

The Japanese yen rose in Asian trading on Wednesday against a basket of major and secondary currencies, remaining in positive territory for a third consecutive session against the US dollar. The move followed strong warnings from Japanese authorities signaling Tokyo’s readiness to intervene to support the local currency.

Meanwhile, according to the minutes of the Bank of Japan’s October meeting, policymakers discussed the need to continue raising interest rates toward levels considered neutral for the economy. Several of the nine board members noted that recent declines in the yen could lead to excessive inflation through higher import costs.

Price Overview

• Japanese yen exchange rate today: The dollar fell 0.4% against the yen to 155.55, from an opening level of 156.21, after recording an intraday high of 156.28.

• The yen ended Tuesday’s session up around 0.4% against the dollar, marking a second consecutive daily gain following strong Japanese warnings over excessive currency movements.

Japanese authorities

Japanese Finance Minister Satsuki Katayama confirmed that Japan has “full freedom of action” to take bold steps to deal with excessive volatility in the yen.

Speaking at a press conference on Tuesday, Katayama said that recent movements in the local currency do not reflect market fundamentals at all, but are driven by speculation, giving Tokyo justification to intervene in the market if necessary.

Katayama added that the government would take appropriate action to counter excessive movements, based on Japan’s agreement with the United States reached in September regarding exchange rate policy.

Earlier on Monday morning in Tokyo, Japan’s top currency diplomat Atsuki Mimura and Chief Cabinet Secretary Minoru Kihara both expressed concern over “sharp and volatile” moves in the foreign exchange market.

They stressed that Japanese authorities are closely monitoring currency developments and warned that officials are ready to take appropriate measures if needed, in a clear signal of potential intervention to curb excessive volatility.

Bank of Japan

According to the minutes of the Bank of Japan’s October meeting, released today in Tokyo, policymakers discussed the need to continue raising interest rates toward levels viewed as neutral for the economy, with some members arguing this would help achieve stable long-term growth.

Several of the nine board members warned that recent declines in the yen could fuel excessive inflation due to rising import costs.

At the October 29–30 meeting, the Bank of Japan kept interest rates unchanged at 0.5%, but Governor Kazuo Ueda sent a strong signal that a rate hike could be approaching. The two hawkish members, Hajime Takata and Naoki Tamura, opposed that decision and unsuccessfully proposed raising rates to 0.75%.

At the subsequent meeting held this month in December, the central bank raised interest rates to 0.75%, the highest level since September 1995, marking the second hike in 2025 after an earlier increase in January.

The October meeting minutes showed that many members already believe conditions are in place for further rate hikes, but they want greater clarity on whether companies will continue raising wages next year, especially amid ongoing uncertainty over the impact of higher US tariffs.

Japanese interest rates

• Market pricing for a quarter-point rate hike by the Bank of Japan at its January meeting remains stable around 20%.

• To prompt a repricing of these expectations, investors are awaiting further data on inflation, unemployment, and wages in Japan.