The US dollar recorded its largest annual decline in eight years during 2025, ending a year of sharp economic volatility with a drop of approximately 8%, according to the Bloomberg Dollar Index. This significant decline comes at a time when investors are increasingly convinced that the greenback will continue its downward trajectory in the coming period, driven by fundamental changes in US monetary policy and the political direction of selecting a new leadership for the central bank.
The impact of monetary policy and the future of interest rates
This decline is closely linked to financial market expectations, which are currently pricing in a significant cut to US interest rates. With Jerome Powell's term nearing its end, the world awaits the selection of a new Federal Reserve chair who is expected to favor a more lenient monetary policy and deeper interest rate cuts than previously anticipated. It is a well-established economic principle that lower interest rates reduce a currency's attractiveness to investors seeking higher returns, prompting capital to migrate to other currencies or alternative investment assets such as gold.
Historical context and impact of customs duties
This decline was not a sudden occurrence, but rather an extension of a downward trend that began after the Trump administration implemented tariffs in April 2024, a date now known in economic circles as "Liberation Day." Historically, trade wars and high tariffs often lead to sharp fluctuations in exchange rates, as they put pressure on economic growth and prompt central banks to take stimulus measures that can weaken the currency.
Analysts' perspective and global markets
In this context, Yusuke Miari, a currency market analyst at Nomura, stated, "The biggest factor affecting the dollar in the first quarter will be the Fed, and it's not just about the January and March meetings, but also who will succeed Jerome Powell after his term ends," according to Bloomberg News. This statement indicates that uncertainty surrounding the next monetary leadership is playing a key role in investors' reluctance to invest in the dollar.
Market data and future forecasts
Official data reinforces this pessimistic outlook for the US dollar. According to data released last Wednesday by the US Commodity Futures Trading Commission, traders increased their bets against the dollar during the week ending December 23. Options markets also pointed to a strong likelihood of continued dollar weakness in January, with expectations that the Federal Reserve's monetary policy will diverge from that of its counterparts in advanced economies, narrowing the interest rate gap and limiting the dollar's dominance.
Expected economic impact
This continued decline is expected to have far-reaching consequences. Domestically, a weaker dollar could boost US exports by making them cheaper for foreign buyers, but it could also increase the cost of imports and exacerbate inflationary pressures. Globally, a weaker dollar is generally good news for emerging economies that borrow in dollars, as it reduces their debt servicing costs and often leads to higher prices for dollar-denominated commodities such as oil and gold.
