The dollar steadied on Tuesday ahead of the release of the December meeting minutes from the Federal Reserve, while the Chinese yuan extended its gains and broke above a key psychological level against the US currency.

Year-end holidays continued to drain liquidity from markets, as traders increasingly expect the dollar to remain under pressure.

The dollar is on track to post its worst annual performance since 2017, with losses approaching 10%.

Some analysts said the December Fed minutes, when the central bank cut interest rates, could reinforce expectations for further monetary easing, as markets have already priced in two additional rate cuts in 2026.

Euro and sterling on track for annual gains

The euro was trading at $1.1767, heading for annual gains of around 14%, while sterling stood at $1.3508, on course to rise by about 8% in 2025.

The dollar index, which measures the US currency against a basket of major peers, is set to record an annual decline of 9.6%, its steepest drop in eight years. The weakness has been driven by expectations of Fed rate cuts, narrowing interest-rate differentials with other currencies, as well as concerns over the US budget deficit and political uncertainty.

The index was last at 98.03 points, not far from the three-month low hit last week.

Strategists at MUFG expect the dollar index to fall by a further 5% next year, citing US economic performance and the direction of monetary policy as the key drivers.

Others, however, pointed to the dollar’s relative stability in recent months and the limited scope for the Fed to deliver much deeper rate cuts.

Guy Miller, chief market strategist at Zurich Insurance Group, said: “We think the dollar will trade in a range around current levels against the major currencies. We’ve largely been moving sideways since the summer, particularly against the Swiss franc and the euro.”

Yuan breaks a key psychological level

China’s onshore yuan broke above the psychologically important 7-per-dollar level for the first time in two and a half years, defying weaker guidance from the central bank as exporters rushed to sell dollars toward year-end.

The yuan strengthened to 6.9951 per dollar, its strongest level since May 2023. It has risen by around 5% against the weakening dollar since early April and is set to end a three-year losing streak.

The People’s Bank of China had sought to curb sharp yuan appreciation by setting weaker daily fixings and issuing verbal warnings through state media, but those efforts failed to reverse the currency’s upward momentum.

Japanese yen and the economy

Meanwhile, the Japanese yen was trading at 155.96 per dollar, slightly away from levels that previously prompted verbal warnings from Tokyo officials and fueled market speculation about possible intervention.

A summary of opinions from Bank of Japan policymakers, released on Monday, showed officials discussing the need to continue raising interest rates even after the hike approved in December, with one member calling for rate increases every few months, highlighting the bank’s focus on inflationary pressures.

Kit Juckes, chief foreign exchange strategist at Société Générale, said movements in dollar/yen are more closely tied to growth expectations than to monetary policy. “What the yen needs, above all else, is stronger GDP growth,” he said.

The Japanese government said last week it expects the economy to grow by 1.1% in the fiscal year ending in March, up from a previous estimate of 0.7% in August, citing a smaller-than-expected impact from US tariffs.

Growth is also forecast to accelerate to 1.3% in the following fiscal year, supported by solid consumption and capital spending, offsetting weaker external demand, according to official projections.

Gold prices rose in the European market on Tuesday, recovering part of the losses recorded in the previous session and holding above a two-week low, supported by buying activity from corrective levels. However, the recovery remains capped by rising US dollar levels in the foreign exchange market.

Markets are awaiting later today the release of the minutes from the Federal Reserve’s latest monetary policy meeting, which are expected to provide strong signals about the outlook for US interest rates in 2026.

Price overview

• Gold prices today: gold rose about 1.2% to $4,383.48, from an opening level of $4,332.37, after touching an intraday low of $4,323.54.

• At Monday’s settlement, gold prices fell around 4.45%, marking the largest daily loss since October, and hit a two-week low at $4,302.57, amid accelerating correction and profit-taking from the all-time high of $4,550.04 per ounce.

US dollar

The US dollar index rose about 0.1% on Tuesday, resuming gains that had paused temporarily in the previous session, reflecting renewed strength in the American currency against a basket of global currencies.

As is well known, a stronger US dollar makes dollar-denominated gold less attractive to buyers holding other currencies.

US interest rates

• According to the CME FedWatch tool, market pricing shows an 82% probability that US interest rates will be left unchanged at the January 2026 meeting, while the probability of a 25-basis-point rate cut stands at 18%.

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

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

Federal Reserve minutes

Later today, the minutes of the Federal Reserve’s latest monetary policy meeting will be released. The meeting, held on December 9–10, resulted in a 25-basis-point interest rate cut to a range of 3.75%, the lowest level since 2022.

The meeting details are expected to provide further clarity on the US interest rate path in 2026, particularly given divisions among policymakers over additional easing next year, with expectations centered on only one 25-basis-point cut.

Gold outlook

Kelvin Wong, market analyst for Asia-Pacific at OANDA, said the previous rally appeared overstretched over the past week, leaving precious metals more vulnerable to downside pressure from leveraged long positions.

SPDR fund

Gold holdings at SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, increased by 0.86 metric tons on Monday, marking the second consecutive daily increase. Total holdings rose to 1,071.99 metric tons, the highest level since June 21, 2022.

The euro declined in the European market on Tuesday against a basket of global currencies, moving into negative territory versus the US dollar, as the American currency resumed its gains ahead of the release of the minutes from the Federal Reserve’s latest meeting, which are expected to show divisions among policymakers over the interest rate path in 2026.

Currency markets remain broadly calm due to thin liquidity during New Year holidays, with traders looking ahead after a disappointing year for several major currencies, led by the US dollar.

Meanwhile, expectations for a European Central Bank interest rate cut in February 2026 have eased, particularly in light of recent improvements in economic activity across the euro area, alongside expectations that this improvement will continue as downside risks recede.

Price overview

• Euro exchange rate today: the euro slipped against the dollar by 0.1% to 1.1764, from an opening level of 1.1772, recording an intraday high at 1.1779.

• The euro ended Monday’s session unchanged, following two consecutive daily losses amid correction and profit-taking from a three-month high of 1.1808.

US dollar

The US dollar index rose about 0.1% on Tuesday, resuming gains that had paused in the previous session, reflecting renewed strength in the American currency against a basket of global currencies.

Later today, the minutes of the Federal Reserve’s latest meeting are due to be released, and are expected to reveal divisions among policymakers over the US interest rate outlook in 2026. This could lead to a pullback in speculation about two rate cuts over the course of next year.

European interest rates

• Money markets currently price the probability of a 25-basis-point interest rate cut by the European Central Bank in February 2026 at below 10%.

• To reprice 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 gap since May 2022, which continues to support a stronger euro versus the US dollar.

The Japanese yen declined in the Asian market on Tuesday against a basket of major and secondary currencies, moving into negative territory versus the US dollar, as the American currency resumed its gains ahead of the release of the minutes from the latest Federal Reserve meeting, which are expected to show divisions among policymakers over the interest rate path in 2026.

Currency markets remain broadly subdued due to thin liquidity amid New Year holidays, with traders looking ahead after a disappointing year for several major currencies, led by the US dollar.

Price overview

• Japanese yen exchange rate today: the dollar rose against the yen by 0.2% to 156.34, from an opening level of 156.03, recording an intraday low at 155.92.

• The yen ended Monday’s session up about 0.3% against the dollar, marking its fourth gain in the past five days, supported by the summary of opinions from the Bank of Japan’s latest monetary policy meeting.

US dollar

The US dollar index rose about 0.1% on Tuesday, resuming gains that had paused in the previous session, reflecting renewed strength in the US currency against a basket of global currencies.

Later today, the minutes of the Federal Reserve’s latest meeting will be released, and are expected to reveal divisions among policymakers over the path of US interest rates in 2026, which could reduce speculation about two rate cuts over the course of next year.

Japanese interest rates

• On Monday in Tokyo, the summary of opinions from the Bank of Japan’s latest monetary policy meeting was released. The meeting, held on December 18–19, resulted in an interest rate hike to 0.75%, the highest level since 1995.

• The summary showed a clear hawkish shift among most board members, with many pointing to the need for further rate increases in the future. They agreed that gradually raising interest rates and scaling back monetary stimulus are necessary to ensure long-term price stability.

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

• To reprice these expectations, investors are awaiting further data on inflation, unemployment, and wage growth in Japan.