The US dollar is set to experience its most significant annual decline since 2017, with major Wall Street banks forecasting continued weakness in the coming year as the Federal Reserve moves forward with interest rate cuts. The currency has fallen approximately 9.5% against a basket of leading global currencies this year, reflecting concerns regarding the US economy amid ongoing trade tensions initiated by President Trump’s tariffs.
The euro has emerged as the strongest competitor, appreciating nearly 14% to surpass $1.17, a peak last seen in 2021. George Saravelos, Deutsche Bank’s global head of FX research, noted that this year has been particularly unfavorable for the dollar within the context of free-floating exchange rates.
Initially, the dollar struggled due to the introduction of aggressive tariffs; it saw a peak decline of 15% against major currencies before regaining some strength. However, the recent decision by the Federal Reserve to resume rate reductions in September has continued to weigh on the currency. Analysts predict that if the Fed continues to lower rates while other global central banks either maintain or increase borrowing costs, the dollar will likely weaken further, with anticipated cuts expected over the next few years.
While the dollar remains the dominant global currency, its current instability has positive implications for US exporters but poses challenges for European companies reliant on US sales. The potential appointment of a new Fed chair, seen as likely to follow political pressure for further cuts, could exacerbate the dollar’s fluctuations. Despite some market optimism surrounding technological investment in the US, uncertainty prevails regarding the dollar’s future strength.
Why this story matters:
- The performance of the dollar impacts global trade and investments.
Key takeaway:
- Continued rate cuts by the Fed could lead to further dollar depreciation next year.
Opposing viewpoint:
- Some analysts believe technological advancements in the US may help maintain economic growth, countering dollar weakness.
