FOREX-Dollar dismal, yen muted in 2025 but euro shines

Rate cuts, fiscal worries and Trump’s tariffs weigh on dollar “Sell dollar” trade still in play as Fed independence concerns persist Yen inches away from recent lows but intervention fears stay (Updates for European trading) By Ankur Banerjee and Samuel Indyk LONDON, Dec 31 (Reuters) - The U.S. dollar inched higher on Wednesday but was still heading for its biggest annual drop since 2017 as interest rate cuts, fiscal worries and erratic U.S. trade policy under President Donald Trump drove currency markets in 2025. Those themes are likely to remain in 2026, suggesting the dollar’s dire performance could extend and underpin the behaviour of some of its peers, including the euro and sterling, which have made significant gains this year. Adding to the dollar’s woes, concerns about the Federal Reserve’s independence under the Trump administration remain in focus. Trump said he plans to announce his pick for the next Fed chair sometime in January, replacing Jerome Powell whose term ends in May and who has faced constant criticism from the president. That backdrop has kept the “sell-dollar” trade firmly in place with positioning remaining net-short since April, according to Commodity Futures Trading Commission data. The euro (EUR=) was down 0.1% at $1.1736 and the pound (GBP=) last bought $1.3434 on the last trading day of the year. Both are poised for their biggest yearly gains in eight years against the U.S. currency. The dollar index (=USD) , which measures the U.S. currency versus six other major units, was at 98.35, adding to its Tuesday gains. The index has declined 9.4% in 2025 while the euro surged 13.4% and the pound gained 7.5%. Other European currencies have also rallied in 2025. Switzerland’s franc (CHF=) is up 14% while Sweden’s crown is up 20%. Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities, said the bearish dollar thesis for 2026 remains a well-subscribed view with “short dollars vs EUR and the AUD expected to perform”. The greenback got a bit of a boost in the previous session after minutes of the Fed’s December meeting showed deep divisions among policymakers as they cut rates earlier this month. Barclays economists noted that some policymakers suggested it would be appropriate to keep rates unchanged for “some time”. “While this certainly does not prevent the committee from cutting rates in January, it does suggest limited support for cutting again, absent further deterioration in labor market conditions,” they said in a note. Traders are pricing in two cuts for 2026, although the central bank itself has projected just one more next year. The dollar’s weakness in 2025 has helped push many of the major currencies as well as emerging markets to strong gains for the year. China’s yuan (CNY=CFXS) broke through the key psychological level of seven to the dollar on Tuesday for the first time in 2-1⁄2 years, defying weaker central bank guidance. The currency rose 4.4% in the year, its sharpest gain since 2020. FRAGILE YEN IS THE OUTLIER The Japanese yen (JPY=) is one of the few currencies that failed to take advantage of the soft dollar in 2025, remaining broadly flat even as the Bank of Japan raised rates twice during the year, once in January and then earlier this month. On Wednesday, the yen was a touch weaker at 156.61 per U.S. dollar, remaining close to levels that brought intervention worries and severe jawboning from officials in Tokyo. Investors have been disappointed with the slow and cautious pace of monetary tightening, with the significant long yen position in April completely reversing by the end of the year. As 2026 unfolds, said MUFG strategists, the conditions for a retracement back lower in dollar-yen should materialise, adding: “The lower U.S. yields go, the greater the chance that the yen could see its safe-haven status revived.” The risk-sensitive Australian dollar (AUD=) last fetched $0.66965, poised for a more than 8% surge over the year, its best annual performance since 2020. The New Zealand dollar (NZD=) eased slightly to $0.57875 but was set for a 3.4% rise in the year, snapping a four-year losing streak. In cryptocurrencies, bitcoin (BTC=) was set to end the year lower by 5.5%, its first annual decrease since 2022. It was last at $88,583, down 30% from a record high of $126,223 seen in October. G10 currency moves against the US dollar