US dollar set for biggest annual drop since 2017 - Reuters
Kyiv • UNN
The US dollar weakened on Wednesday, poised for its biggest annual drop since 2017, as investors anticipate further Fed rate cuts. The euro and pound sterling strengthened, reaching new three-month highs.
The US dollar weakened on Wednesday and is set for its largest annual decline since 2017, possibly with further consequences, as investors assume the US Federal Reserve will be able to cut rates further next year, even as most other countries appear to have completed monetary policy easing, UNN reports with reference to Reuters.
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Convincing US GDP data released on Tuesday did not affect the rate outlook, and investors are pricing in approximately two more Fed rate cuts in 2026.
"We expect the Federal Open Market Committee (FOMC) to compromise on two more 25 basis point cuts to 3-3.25%, but we see the risks as lower," said Goldman Sachs US Chief Economist David Mericle, citing slowing inflation as the reason for this forecast.
On Wednesday, the euro and pound sterling strengthened slightly, reaching new three-month highs, although they remained broadly stable throughout the day at $1.180 and $1.3522, respectively.
Against a basket of currencies, the dollar index fell to a 2.5-month low of 97.767. It is expected to lose 9.8% year-to-date, which would be the steepest annual decline since 2017. Further weakening in the last week of the year would lead to the largest decline since 2003.
The dollar has had a turbulent year, overshadowed by chaotic tariffs from US President Donald Trump, which triggered a crisis of confidence in US assets earlier this year, as well as his influence on the Fed, raising concerns about its independence.
In contrast, the euro has risen just over 14% year-to-date, putting it on track for its best performance since 2003, the publication writes.
The European Central Bank kept interest rates unchanged last week and revised some growth and inflation forecasts upwards, which likely closes the door to further monetary policy easing in the near future.
Traders reacted by pricing in a small probability of policy tightening next year, reflecting expectations for Australia and New Zealand, where such moves are seen as rate hikes.
This, in turn, supported two currencies: the Australian dollar, which gained 8.4% year-to-date and reached a three-month high of $0.6710 on Wednesday, and the New Zealand dollar similarly reached a 2.5-month high of $0.58475.
The pound sterling has risen by more than 8% year-to-date. Investors are betting that the Bank of England will cut interest rates at least once in the first half of 2026 and estimate the probability of a second cut at approximately 50% by the end of the year.
However, most currencies have significantly lost ground against precious metals such as gold, which reached a new record high on Wednesday.
This year, the best performers were the currencies of small European countries, often with low debt levels.
The dollar lost 12% against the Norwegian krone, 13% against the Swiss franc - to the latest rate of 0.7865 francs - and 17% against the Swedish krona, reaching its lowest level since early 2027 - 9.1 - on Wednesday.
Currently, the main focus in the foreign exchange market remains on the Japanese yen, and traders are concerned about the possibility of intervention by the Japanese authorities to curb the currency's decline.
Japanese Finance Minister Satsuki Katayama said on Tuesday that Japan has full discretion over excessive yen fluctuations, issuing the sharpest warning to date about Tokyo's readiness to intervene.
Her statements halted the yen's decline: on Wednesday, the dollar fell 0.3% against the Japanese currency to 155.83 yen, after a 0.5% drop in the previous session.
Although the Bank of Japan announced a long-awaited interest rate hike last Friday, the move was well anticipated, and comments from Bank of Japan Governor Kazuo Ueda disappointed some market participants who had hoped for tougher rhetoric, leading to the yen's decline afterward.
This has made investors wary of official yen purchases by Tokyo, especially given the reduction in trading volumes towards the end of the year, which analysts believe would be a favorable time for the authorities to act.