The US dollar ended 2025 with a sharp decline of 9.5%, marking its worst performance in eight years, while the euro and the British pound strengthened significantly. The Japanese yen was an exception due to its slow pace of monetary tightening, with long positions reversing completely by year-end, leading to a full retracement of gains and leaving the currency flat for the year. Looking ahead to 2026, the weakening trend of the US dollar is likely to persist amid growing doubts over the Federal Reserve's independence and global economic expansion, providing opportunities for non-US dollar currencies and commodity-linked currencies to continue their rise.
The foreign exchange market closed 2025 with a significant weakening of the US dollar, which is experiencing its largest annual decline since 2017.
The latest market dynamics show that the US Dollar Index plummeted by 9.5% over the year, recording its worst performance in eight years. On the last trading day of 2025, the US Dollar Index hovered around 98.228, but the overall downward trend remained difficult to reverse. Against the backdrop of a weakening dollar, non-US dollar currencies rebounded across the board, with the euro and pound leading the way with annual gains of 13.5% and 7.6%, respectively, both achieving their best annual performances in eight years.
The yen was the sole exception. Despite the Bank of Japan raising interest rates twice during the year, the slow pace disappointed investors. By the end of the year, the large number of long yen positions established in April had completely reversed, causing the yen to give back its earlier potential gains and failing to benefit from the dollar's downturn.
Market concerns over the Federal Reserve's independence further exacerbated pressure on the dollar. As Trump announced plans to reveal his nominee for the next Federal Reserve Chair in January to replace Jerome Powell, whose term expires in May, policy uncertainty significantly increased. According to data from the US Commodity Futures Trading Commission (CFTC), the market has maintained a net short position in the dollar since April this year, reflecting continued investor pessimism about the dollar’s outlook.
Looking ahead to 2026, analysts generally believe that the dollar's weakness may persist. Strategists at Goldman Sachs pointed out that against the backdrop of robust global economic growth, rate cuts by the Federal Reserve while other central banks remain on hold, the dollar is likely to continue weakening. This not only supports the strength of the euro and pound but also provides breathing space for emerging market currencies.
Dollar outlook clouded
The dollar's decline in 2025 mainly stemmed from the dual pressures of macroeconomic policy and the political environment. In addition to the start of a rate-cutting cycle, concerns over the expansion of the US fiscal deficit and Trump's tariff policies lingered. Prashant Newnaha, Senior Asia-Pacific Rates Strategist at TD Securities, stated that the rationale for being bearish on the dollar remains valid into 2026, and trades shorting the dollar against the euro and Australian dollar are expected to continue performing well.
Although the minutes from the Federal Reserve’s December meeting showed internal divisions among policymakers regarding rate cuts, providing brief support to the dollar, it did not alter long-term expectations. Current trader pricing indicates that the market expects two rate cuts by the Federal Reserve in 2026, higher than the central bank’s own forecast of one. Goldman Sachs added in its report that if signs of a labor market downturn or deeper rate cuts emerge, the dollar's decline could widen further.
Yen: Reversal expectations after missing opportunities
The yen was one of the few currencies in 2025 that failed to capitalize on the dollar's weakness to achieve gains. Although the Bank of Japan raised interest rates twice, in January and early December, investors were disappointed by the slow and cautious pace of monetary tightening. The substantial long yen positions in the market in April had completely reversed by the end of the year, causing the yen to give up its gains, leaving its performance for the year largely flat.
On Wednesday, the yen stabilized near 156.35 against the US dollar, a level that remains within the range triggering concerns of intervention and verbal warnings from Tokyo officials. Strategists at MUFG believe conditions for a pullback in USD/JPY may mature as 2026 approaches. With the decline in US yields, the yen's safe-haven status is expected to recover. The institution predicts that if market momentum shifts, the yen could rebound to 146 per US dollar by the fourth quarter of 2026.
Eurozone and commodity currencies rise strongly
The winners in the 2025 foreign exchange market are primarily concentrated in eurozone and commodity currencies. EUR/USD remained around 1.1747 at year-end, while GBP/USD was quoted at 1.3463. Both currencies saw robust gains, mainly driven by broad-based dollar weakness. Meanwhile, commodity currencies also performed well. The risk-sensitive Australian dollar is expected to soar more than 8% for the year, marking its best annual performance since 2020. Although the New Zealand dollar rose less sharply, it still recorded a 3.4% annual increase, ending four consecutive years of declines.
Domestically, the onshore renminbi broke through the 7.0 mark against the US dollar yesterday, reaching a high of 6.9960, the strongest level since May 17, 2023. This psychologically significant threshold had already been breached by the offshore renminbi on December 25. Market participants expect further appreciation potential for the renminbi, supported by capital inflows and expectations of economic recovery.
As 2026 approaches, the market broadly anticipates that this currency rotation pattern, dominated by dollar weakness, will persist.
Editor/jayden