The dollar records its biggest annual loss since 2017, while the euro rebounds
The US dollar held steady in the final trading session of 2025, heading for its biggest annual decline since 2017, amid economic pressures stemming from interest rate cuts and concerns about volatile trade policies that have cast a shadow over global markets.
Dollar Index Performance and Monetary Policies
The dollar index, which measures the performance of the US currency against a basket of six major currencies, registered a level of 98.228, holding onto slight gains made overnight. However, the overall picture for the year shows a sharp decline, with the index falling by 9.5% during 2025. This decline is mainly attributed to the Federal Reserve's move towards easing monetary policy and lowering interest rates, which has reduced the attractiveness of returns on dollar-denominated assets compared to other currencies.
Euro and Sterling Rebound
In contrast, European currencies benefited from the dollar's weakness. The euro showed remarkable stability at $1.1747, reflecting a relative improvement in economic confidence within the Eurozone. The British pound also performed strongly, reaching $1.3463 on the last trading day of the year, benefiting from monetary policy differences and economic data that supported the British currency.
Asian currency movements and commodity currencies
In Asian markets, the Japanese yen held steady at 156.35 against the dollar, as Japan attempts to balance its loose monetary policy with external pressures. In the commodities markets, the Australian dollar was among the top performers, reaching US$0.66965 in recent trading and on track for an annual gain of over 8%, a trend that often reflects its correlation with raw material and commodity prices. Conversely, the New Zealand dollar saw a slight decline to US$0.57875.
Global economic impacts
This significant decline in the dollar carries broad economic implications. Historically, a weaker dollar makes US exports more competitive in global markets, but it can also raise the cost of imports, potentially leading to inflationary pressures. For emerging economies, a weaker dollar could provide some relief from the burden of debt denominated in US dollars. As the new year begins, financial markets are cautiously watching how central banks will react to these developments and whether global trade policies will stabilize or become more volatile.
