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The dollar is poised for its biggest annual decline in eight years and investors believe further declines will come if the next head of the Federal Reserve opts for deeper interest rate cuts, as expected.
The Bloomberg Dollar Spot Index has fallen about 8% this year so far. After falling following Donald Trump’s April tariffs, the greenback came under sustained pressure as the president launched his aggressive campaign for a dovish appointee to be Fed chair next year.
“The most important factor for the dollar in the first quarter will be the Fed,” said Yusuke Miyairi, currency strategist at Nomura. “And it’s not just about the January and March meetings, but also who will be the Fed chairman after Jerome Powell’s term ends.”
With at least two rate cuts planned for next year, U.S. policy is diverging from that of some of its developed peers, further dampening the dollar’s appeal.
The euro rose against the greenback as subdued inflation and the next wave of European defense spending keep bets on a rate cut near zero. In Canada, Sweden and Australia, rate traders are betting on increases.
The dollar gauge rose 0.2% on Wednesday after Labor Department data showed U.S. applications for unemployment benefits fell to one of the highest levels last week. the lowest levels this year. The greenback index was still on track to end December down about 1%.
This month, a brief period of bullish positioning on the dollar returned to the more pessimistic stance that has dominated since April’s tariffs fueled concerns about the U.S. economy, Commodity Futures Trading Commission data for the week ending Dec. 16 show.
For now, it’s all about the Fed and who will replace Jerome Powell, whose term as chairman is set to end in May.
Trump recently said he had a favorite candidate, but is in no hurry to make an announcement – although he thinks he could fire the current head of the central bank.
National Economic Council Director Kevin Hassett has long been considered the leading candidate, while Trump has also expressed interest in former Fed Governor Kevin Warsh. Fed Governors Christopher Waller and Michelle Bowman as well as BlackRock’s Rick Rieder are also reportedly in the running.
“Hassett would be more or less priced in since he’s been in the lead for a while now, but Warsh or Waller probably wouldn’t be as quick to cut interest rates, which would be better for the dollar,” said Andrew Hazlett, a currency trader at Monex Inc.
