US Dollar Ends 2025 with Largest Annual Decline in Eight Years

The US dollar wrapped up 2025 with one of its most significant declines in recent history, marking its largest annual drop in eight years. This downturn reflects a notable shift in global market sentiment and investor outlook for the future.

Market speculation has intensified around the continued depreciation of the US currency, driven by anticipated monetary and political changes, particularly within the Federal Reserve.

Extent of the Decline

Data from Bloomberg indicates that the Bloomberg Dollar Index fell approximately 8% throughout 2025. The dollar struggled to recover from losses sustained since last spring, despite some brief attempts at a rebound.

This decline was notably influenced by a sharp drop following the Trump administration's implementation of tariffs in April, an event referred to as "Liberation Day," the repercussions of which lingered until year-end.

The Role of the Federal Reserve

Analysts suggest that the Federal Reserve's policy decisions will be crucial in shaping the dollar's trajectory in the coming months, particularly as Chairman Jerome Powell's term is set to conclude next year.

Yosuke Miyairi, a currency market analyst at Nomura, noted that market participants are not only focused on interest rate decisions in January and March but are also keenly interested in Powell's successor. There are expectations that Trump may appoint a Fed chair who favors a more accommodative monetary policy and additional interest rate cuts.

Outlook for 2026

Forecasts indicate that the dollar may continue to weaken in January, though the rate of decline is expected to slow in subsequent months, according to currency market traders.

However, uncertainty prevails, with anticipation surrounding new monetary policies and the direction of the incoming US administration.

Currencies Gaining Ground

In contrast to the dollar's decline, other currencies have experienced notable appreciation, particularly the euro, which has benefited from easing inflationary pressures and expectations of increased defense spending in Europe, reducing the likelihood of interest rate cuts in the Eurozone.

Moreover, expectations of interest rate hikes by central banks in Canada, Sweden, and Australia have bolstered their currencies against the dollar.

Positive Data Fails to Shift Momentum

Despite the release of favorable US economic data indicating a drop in unemployment claims to one of the lowest levels this year, the dollar did not alter its overall downward trend.

The dollar index remained relatively stable in the final sessions of the year, with a slight increase of 0.2%. However, it concluded December with a 1.2% decline, reaffirming that fundamental pressures on the US currency persist.