A bleak year for the US dollar is drawing to a close with signs of stabilization, but many investors believe the currency’s decline will resume next year as global growth improves and the Federal Reserve moves further toward monetary easing.

The US dollar has fallen by about 9% this year against a basket of currencies (DXY), heading for its worst annual performance in eight years. The decline has been driven by expectations of interest rate cuts by the Federal Reserve, narrowing interest rate differentials with other major currencies, as well as rising concerns over US fiscal deficits and political uncertainty.

Investors widely expect the dollar to remain weak, as other major central banks keep policy steady or tighten, and as a new Federal Reserve chair takes office — a change that is expected to signal a more dovish tilt in the central bank’s stance.

The dollar typically weakens when the Federal Reserve cuts interest rates, as lower US rates make dollar-denominated assets less attractive to investors, reducing demand for the currency.

“The reality is that we still have an overvalued US dollar from a fundamental perspective,” said Karl Schamotta, chief market strategist at global corporate payments firm Corpay.

Determining the dollar’s path is critically important for investors, given the currency’s central role in the global financial system. A weaker dollar boosts profits for US multinationals by increasing the value of overseas revenues when converted back into dollars, and also enhances the appeal of international markets by adding a currency tailwind alongside underlying asset performance.

Despite the dollar’s recovery in recent months — with the dollar index rising by nearly 2% from its September lows — currency strategists have largely maintained forecasts for a weaker dollar in 2026, according to a Reuters poll conducted between November 28 and December 3.

The dollar’s broad real effective exchange rate — its value against a wide basket of foreign currencies adjusted for inflation — stood at 108.7 in October, only slightly below its record peak of 115.1 in January, indicating that the US currency remains overvalued, according to data from the Bank for International Settlements.

Global growth

Expectations of a weaker dollar hinge on convergence in global growth rates, with the US expected to lose some of its growth advantage as other major economies gain momentum.

“I think what’s different this time is that the rest of the world is going to grow at a faster pace next year,” said Anojit Sarin, portfolio manager at Brandes Global.

Investors expect fiscal stimulus in Germany, policy support in China, and improving growth trajectories in the euro area to erode the US growth premium that has supported the dollar in recent years.

“When the rest of the world starts to look better from a growth perspective, that tends to be supportive of continued dollar weakness,” said Paresh Upadhyaya, head of fixed income and currency strategy at Amundi, Europe’s largest asset manager.

Even investors who believe the worst of the dollar’s decline may be over say that any significant hit to US growth could pressure the currency.

“If there are any signs of weakness at any point next year, that could be bad for markets, but it would certainly weigh on the dollar as well,” said Jack Hare, investment analyst at mutual fund firm Guidestone Funds, who does not expect a major further dollar decline as a base case in 2026.

Diverging central bank policies

Expectations that the Federal Reserve will continue cutting interest rates, while other major central banks hold rates steady or raise them, could add further pressure on the dollar.

The deeply divided Federal Reserve cut interest rates in December, with the median of policymakers’ projections pointing to an additional quarter-point cut next year.

As Jerome Powell prepares to step aside ahead of the appointment of a new Fed chair by President Donald Trump, markets may price in a more dovish central bank stance next year, amid Trump’s pressure for lower interest rates.

Several leading and widely discussed candidates for the role — including White House economic adviser Kevin Hassett, former Fed governor Kevin Warsh, and current governor Chris Waller — have argued that interest rates should be lower than current levels.

“Even though the market is expecting limited movement from the Federal Reserve next year, we think the broader trend points toward weaker growth and weaker employment,” said Erik Merlis, co-head of global markets at Citizens in Boston, explaining why they are positioned short the dollar against G10 currencies.

By contrast, traders believe the European Central Bank will keep interest rates steady in 2026, although a rate hike is not completely off the table. The ECB left rates unchanged at its December meeting and revised some of its growth and inflation forecasts higher.

Not a straight line

Despite the longer-term outlook favoring a weaker dollar, investors cautioned against ruling out a near-term rebound.

Continued enthusiasm around artificial intelligence, and the resulting capital flows into US equities, could provide temporary support for the dollar.

In addition, support for US growth from the reopening of the government following this year’s shutdown, along with tax cuts enacted this year, could lift the dollar in the first quarter, according to Sarin of Brandes.

“But we tend to think that won’t be a sustainable driver for the dollar over the course of the year,” he added.

Gold prices rose in European trading on Monday, extending gains for a second consecutive day and entering a new phase of record-setting highs, particularly after breaking above the $4,400-per-ounce level for the first time in history. The move was driven by strong investment demand for the precious metal and supported by a decline in the US dollar in the foreign exchange market.

These developments come amid growing bets that the Federal Reserve will cut US interest rates twice next year, especially after recent consumer price data showed easing inflationary pressures on US policymakers.

Price overview

Gold prices today: gold rose by about 1.9% to $4,420.06 per ounce, marking a new all-time high, from an opening level of $4,338.71, after touching an intraday low of $4,338.05.

At Friday’s settlement, gold prices rose 0.15%, marking the second gain in the past three days, amid relatively active safe-haven buying.

The precious metal gained 0.9% last week, recording a second consecutive weekly increase, supported by interest rate cuts in the US and the UK.

US dollar

The dollar index fell 0.15% on Monday, retreating from a one-week high and heading toward its first loss in four sessions, reflecting a pause in the dollar’s advance against a basket of major and minor currencies.

Beyond corrective moves and profit-taking, the dollar weakened following cautious comments from some Federal Reserve officials, which highlighted growing concern over softness in US labor market indicators.

US interest rates

According to the CME FedWatch tool, pricing for keeping US interest rates unchanged at the January 2026 meeting currently stands at 78%, while the probability of a 25-basis-point rate cut is priced at 22%.

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

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

Gold outlook

Matt Simpson, senior analyst at StoneX, said that December typically delivers positive returns for gold and silver, meaning seasonal conditions are supportive.

Simpson added that with gold already up about 4% this month and year-end approaching, investors may wish to exercise caution due to thinner trading volumes and a higher likelihood of profit-taking.

According to Reuters technical analyst Wang Tao, spot gold may rise to $4,427 per ounce after breaking through a key resistance level at $4,375.

SPDR fund

Gold holdings at SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, were unchanged on Friday for the second consecutive day, leaving total holdings steady at 1,052.54 metric tons.

The euro rose in European trading on Monday against a basket of global currencies, starting the week on a positive note versus the US dollar, as the dollar’s rally paused after a strong run of gains.

The single currency’s rebound was also supported by a decline in expectations that the European Central Bank will cut interest rates in February 2026, particularly amid recent improvements in economic activity across the euro area, 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 $1.1722, from an opening level of $1.1708, after touching an intraday low of $1.1706.

The euro ended Friday’s session down 0.15% against the dollar, marking a fourth consecutive daily loss, as corrective moves and profit-taking continued from a three-month high at $1.1804.

The euro lost 0.3% against the dollar last week, recording its first weekly loss in a month, amid slower investment demand for the single currency.

US dollar

The dollar index fell by more than 0.1% on Monday, retreating from a one-week high and heading toward its first loss in four sessions, reflecting a pause in the dollar’s advance against a basket of major and minor currencies.

Beyond corrective moves and profit-taking, the dollar weakened following cautious comments from some Federal Reserve officials, which highlighted growing concern over softness in US labor market indicators.

European interest rates

In line with expectations, the European Central Bank kept its key interest rates unchanged last week at 2.15%, the lowest level since October 2022, marking the fourth consecutive meeting with no change.

The ECB reaffirmed its data-dependent, meeting-by-meeting approach, without committing to a specific interest rate path, noting that current rates are appropriate given stable inflation and economic growth.

ECB President Christine Lagarde said the bank remains in a “good position” and stressed that there is consensus within the Governing Council to keep all options open, including the possibility of raising rates if necessary.

Money market pricing for a 25-basis-point rate cut by the ECB in February 2026 currently remains below 10%.

To reprice those expectations, investors are awaiting further euro area economic data on inflation, unemployment, and wage growth.

The Japanese yen rose in Asian trading on Monday against a basket of major and minor currencies, recouping part of the sharp losses it suffered on Friday against the US dollar, and beginning to recover from a four-week low, supported by relatively active buying from lower levels and by warnings from Japanese government officials about the possibility of intervention in the foreign exchange market.

On Friday, the Bank of Japan raised its benchmark interest rate by a quarter of a percentage point to 0.75%, the highest level in three decades, in a move that was widely expected by markets.

The accompanying monetary policy statement reinforced expectations that normalization and further rate hikes will continue if economic forecasts materialize. However, comments from Governor Kazuo Ueda were less hawkish than anticipated, leading to a decline in expectations for Japanese rate hikes during the first half of next year.

Price overview

The Japanese yen exchange rate today saw the dollar fall 0.3% against the yen to ¥157.23, from an opening level of ¥157.68, after recording an intraday high of ¥157.71.

The yen ended Friday’s session down 1.45% against the dollar, marking its second loss in the past three days and its largest daily decline since October 6, driven by comments from Kazuo Ueda.

The yen also posted a weekly loss of 1.2% against the dollar last week, its second consecutive weekly decline, amid weakening expectations for Japanese interest rate hikes in the first half of next year.

Japanese authorities

Early Monday morning in Tokyo, Japan’s top currency diplomat Atsuki Mimura and government spokesman Minoru Kihara expressed concern over “sharp and volatile” moves in the foreign exchange market.

They confirmed that Japanese authorities are closely monitoring currency developments, warning that officials are prepared to take appropriate action when necessary, in a clear signal of potential intervention to curb excessive volatility.

Japanese interest rates

The Bank of Japan’s policy board unanimously decided last week to raise interest rates by 25 basis points to 0.75%, the highest level since September 1995, marking the second rate hike in 2025 following an earlier move in January.

The Bank of Japan said that, given that real interest rates remain at extremely low levels, it will continue to raise rates if its economic and price forecasts are met.

Governor Kazuo Ueda indicated that the bank will examine the so-called neutral interest rate, in light of how the economy and prices respond to changes in interest rates, signaling a flexible, data-dependent approach aligned with actual economic conditions.

Following the bank’s meeting and Ueda’s remarks, market pricing for a quarter-point rate hike at the Bank of Japan’s January meeting remained below 20%.

To reprice those expectations, investors are awaiting further data on inflation, unemployment, and wage levels in Japan.

Views and analysis

Tony Sycamore, market analyst at IG in Sydney, said that while the Bank of Japan’s statement noted that real yields remain “significantly low,” which could signal further monetary tightening in the future, Governor Ueda’s press conference offered little new, merely reiterating the data-dependent approach.

Sycamore added that the lack of clearer guidance on the future pace of Japanese interest rate hikes disappointed markets, triggering selling pressure on the yen.