Plunging nearly 10%! The US dollar could experience its worst year since 2003, as global central bank policy divergence becomes a trigger for the crash.

Plunging nearly 10%! The US dollar could experience its worst year since 2003, as global central bank policy divergence becomes a trigger for the crash.

Under the dual pressure of rising expectations for a Fed rate cut and the hawkish stances of major global central banks, the US dollar is experiencing a historic wave of selling.

The US Dollar Index fell to a two-and-a-half-month low of 97.767 on Wednesday, with a cumulative decline of nearly 10% this year. If this downtrend continues through the last week of the year, the dollar is likely to record its largest annual drop since 2003, marking its worst yearly performance since 2017. Meanwhile, the euro has risen more than 14% against the dollar this year, on track for its best annual performance since 2003.

Despite the robust US GDP data released on Tuesday, it has not changed the market's pricing for interest rate prospects. Investors now expect the Fed to cut rates about two more times by 2026. In contrast, policymakers in the Eurozone, Australia, and New Zealand are sending very different signals, and the market even anticipates that some central banks' next move could be a rate hike rather than a cut.

The persistent weakness of the dollar has pushed non-dollar currencies higher across the board, from major currencies to Nordic ones, all performing strongly. The pound and Australian dollar reached multi-month highs on Wednesday, while the Swedish krona hit its strongest level since early 2022. In addition, as fiat currencies depreciate, the spot price of gold hit a historic high on Wednesday.

Fed Rate Path and Asset Confidence Crisis

Although US economic data is still decent, the market remains firm in its bets on the Fed's easing path. David Mericle, chief US economist at Goldman Sachs, said he expects the FOMC (Federal Open Market Committee) to carry out two more 25-basis-point rate cuts as inflation cools, bringing rates down to the 3%-3.25% range, and noted that risks skew to even lower levels.

In addition to interest rate factors, confidence in dollar assets has also been disturbed by political factors. The dollar has seen sharp swings this year, not only hit by Trump's chaotic tariff policies but also by the president's growing influence on the Fed, which has sparked market concerns about the Fed's independence. Earlier this year, this even triggered a crisis of confidence in US assets.

Increasing Global Central Bank Policy Divergence

In sharp contrast with the Fed’s dovish outlook, other major global central banks are tightening or maintaining restrictive policies. The European Central Bank last week kept rates unchanged but raised some growth and inflation forecasts, an act interpreted by the market as closing the door on further easing in the near future. Traders repriced accordingly, judging that while remote, the chance of tighter policy next year has now emerged.

In Oceania, the next moves by the central banks of Australia and New Zealand are widely seen as rate hikes. This has directly boosted the Australian and New Zealand dollars; the Australian dollar is up 8.4% against the US dollar so far this year, reaching a three-month high of $0.6710 on Wednesday, while the New Zealand dollar also hit a two-and-a-half-month high.

The stance of the Bank of England has also supported the pound, which is up more than 8% this year. Investors are betting the Bank of England will cut rates at least once in the first half of 2026, with about a 50% chance of a second cut before the year's end. This relatively moderate rate cut outlook also supports the pound.

Against the backdrop of the dollar’s broad weakness, currencies of small European countries with low debt levels are particularly strong. The dollar is down 12% against the Norwegian krone this year, 13% against the Swiss franc, and a sharp 17% against the Swedish krona, which reached 9.167 on Wednesday, its highest since early 2022.

Meanwhile, most currencies have seen major depreciation against precious metals. Not just the dollar—gold prices hit a new record on Wednesday, highlighting the market’s flow into safe-haven assets amid global policy uncertainty.

High Risk of Yen Intervention

Another current focus in FX markets is the Japanese yen. Although the Bank of Japan delivered an eagerly awaited rate hike last Friday, Governor Kazuo Ueda’s remarks were less hawkish than the market had expected, causing the yen to weaken even after the hike. This has made investors highly vigilant for possible Japanese official intervention.

Japanese Finance Minister Satsuki Katayama gave the strongest warning yet on Tuesday, saying Japan has a "free hand" in dealing with excessive yen fluctuations. This statement halted the yen’s slide, with dollar/yen dropping 0.3% to 155.83 on Wednesday. Analysts note that as the year-end approaches, market liquidity thins, which is often the best opportunity for authorities to act; traders are closely watching for any signs of moves from Tokyo.

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