Dollar set for worst year since 2017 as Fed leadership drama drives currency outlook
The Dollar set for worst year since 2017 closed 2025 after its sharpest annual decline in eight years. The Bloomberg Dollar Spot Index fell about 8% during the year. Moreover, traders expect further weakness in 2026. This outlook rests largely on Federal Reserve policy direction and leadership uncertainty.
After President Donald Trump announced new tariffs in April, the dollar declined sharply. It then failed to recover meaningfully. Expectations grew that Trump will appoint a dovish successor to Federal Reserve Chair Jerome Powell. Powell’s term ends next year. Consequently, market sentiment shifted against the currency.
According to market participants, the Dollar set for worst year since 2017 reflects deep concern about monetary policy credibility. Currency traders are therefore positioning for additional downside.
Federal Reserve policy expectations dominate the dollar outlook
“The biggest factor for the dollar in first quarter will be the Fed,” said Yusuke Miyairi, a foreign-exchange strategist at Nomura. He added that attention focuses not only on policy meetings in January and March but also on who will replace Jerome Powell.
With at least two interest-rate reductions priced in for next year, the Federal Reserve’s policy path now diverges from several developed peers. As a result, the dollar’s relative appeal has weakened. Data from the Commodity Futures Trading Commission shows traders increased bearish dollar positions in the week through December 23.
Options markets also indicate continued weakness in January. However, traders expect some moderation in the following months. Still, sentiment remains fragile as long as policy uncertainty persists.
Global rate divergence increases pressure on the US dollar
While the US considers rate cuts, conditions differ abroad. The euro has strengthened against the greenback. Benign inflation and anticipated European defense spending have pushed rate-cut expectations in the euro region close to zero. Meanwhile, traders in Canada, Sweden, and Australia are wagering on interest-rate increases.
This divergence has reduced demand for US assets. Consequently, the Dollar set for worst year since 2017 remains under structural pressure. On Wednesday, the dollar index was little changed. It had earlier risen as much as 0.2% after US Labor Department data showed weekly unemployment claims fell to among the lowest levels this year. Still, the index declined 1.2% in December.
Trump’s Fed succession choices shape market confidence
President Trump recently suggested he has a preferred candidate to succeed Powell. However, he said he is in no hurry to announce. He also mused publicly about possibly firing the current Fed chair.
National Economic Council Director Kevin Hassett is widely viewed as the frontrunner. Trump has also expressed interest in former Fed Governor Kevin Warsh. Fed Governors Christopher Waller and Michelle Bowman, along with BlackRock’s Rick Rieder, are also seen as potential candidates.
“Hassett would be more or less priced in,” said Andrew Hazlett, a foreign-exchange trader at Monex Inc. “But Warsh or Waller would likely not be as quick to cut, which would be better for the dollar.”
Thus, leadership selection remains a key risk factor for currency markets.
Strategic implications for businesses and investors
For companies operating across borders, currency volatility introduces new planning risks. Revenue forecasting, supply-chain pricing, and capital allocation decisions increasingly depend on central bank stability. In such conditions, executives must integrate monetary policy risk into strategic frameworks.
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As 2026 approaches, the Dollar set for worst year since 2017 signals not only a currency shift but a broader recalibration of global financial expectations.
How should global businesses prepare if central bank credibility becomes the dominant market variable?
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