By Anya Andrianova
(Bloomberg) — The U.S. dollar ended 2025 with the sharpest annual retreat in eight years and investors say more declines are coming if the next Federal Reserve chief opts for deeper interest-rate cuts as anticipated.
The Bloomberg Dollar Spot Index fell about 8% this year and traders are betting on further weakness. After tumbling in the wake of President Donald Trump’s tariff rollout in April, the greenback failed to rebound much in part on expectations that Trump will name a dovish successor to Fed Chair Jerome Powell, whose term ends next year.
“The biggest factor for the dollar in first quarter will be the Fed,” said Yusuke Miyairi, a foreign-exchange strategist at Nomura. “And it’s not just the meetings in January and March, but who will be the Fed chair after Jerome Powell ends his term.”
With at least two rate reductions priced in for next year, the Fed’s policy path diverges from some of its developed peers, dimming the dollar’s appeal. Traders raised their bearish dollar wagers in the week through Dec. 23, according to Commodity Futures Trading Commission data reported Wednesday. Options pointed to further dollar weakness in January with some moderation in the following months.
The euro has surged against the greenback as benign inflation and a coming wave of European defense spending keep rate-cut bets in the euro region close to zero. In Canada, Sweden and Australia, meanwhile, traders are wagering on hikes.
The dollar gauge was little changed Wednesday after rising as much as 0.2% earlier as Labor Department data showed applications for U.S. unemployment benefits fell last week to one of the lowest levels this year. The greenback index fell 1.2% in December.
Trump recently teased that he has a preferred candidate to succeed Powell, but is in no hurry to make an announcement — while also musing that he might fire the central bank’s current leader.
National Economic Council Director Kevin Hassett has long been seen as the leading candidate, while Trump also expressed interest in former Fed Governor Kevin Warsh. Fed Governors Christopher Waller and Michelle Bowman and BlackRock’s Rick Rieder are also seen as being in the running.
“Hassett would be more or less priced in since he has been the frontrunner for some time now, but Warsh or Waller would likely not be as quick to cut, which would be better for the dollar,” said Andrew Hazlett, a foreign-exchange trader at Monex Inc.
What Bloomberg Strategists Say…
“A long uptrend, combined with a greenback that has appeared overvalued in recent years, has led consensus to forecast persistent dollar weakness versus the euro for the past nine years, with the same expectation for 2026. Yet EUR/USD depreciated in six of those years, highlighting a twofold problem with this view. First, valuation is a poor predictor of price action. Second, consensus forecasts tend to chase spot and therefore provide lagged signals.”
— Skylar Montgomery Koning, macro strategist. For full analysis, click here.
–With assistance from Carter Johnson, Vassilis Karamanis, Stephen Kirkland and George Lei.
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Last modified: January 1, 2026
