The USD’s momentum remains weak after the FOMC meeting. The DXY Index depreciated by 0.5% overnight, at a slightly faster pace than the previous day’s 0.4% drop. The index extended its decline below November’s 99-100.4 consolidative range to 98.3, retracing 50% of its rally from 96.2 to 100.4 over September 17-November 21. The next test will be the 61.8% Fibonacci retracement level at 97.8. As of yesterday, spot gains in every DXY currency were positive for the year.
For the year 2025, the USD’s narrative shifted from the post-Liberation Day cracks in its credibility in 2Q25 to a steadier period of consolidation in 2H25, as major central banks converged on a common, data-dependent, meeting-by-meeting stance. The final quarter, however, was defined by the DXY’s turn from recovery to renewed selling after this week’s Fed cut effectively undercut Fed Chair Jerome Powell’s late-October warning that a December move was not a forgone conclusion.
More importantly, monetary policy paths appear to be diverging again. While markets still price in 1-2 additional Fed cuts in 2026, other central banks have dialled back concerns about the impact of US tariffs on their economies and signalled that they may have reached the end of their easing cycles. As a result, markets have begun exploring which central banks could move first to hike in 2026, with Australia, New Zealand, and Canada emerging as initial candidates. Not surprisingly, the AUD, CAD, and NZD have rebounded in December, with AUD the only one appreciating in 2H25 on top of its 1H25 gain.
The European currencies, CHF and EUR, remained the bellwethers of this year’s weak-USD story. Their 2H25 consolidation was narrowly confined to the lowest quartile of their 1H25 ranges, and both are now trading close to their year’s highs. GBP was a less impressive anti-USD proxy amid fiscal concerns and expectations of a Bank of England rate cut next week. Even so, GBP/USD held the 1.30 support and rebounded, underscoring that the UK Autumn Budget was a credibility issue around the Chancellor’s self-imposed fiscal rules, not a repeat of the 2022 mini-budget crisis.
The JPY remains the most disappointing currency, unwinding this year’s gains at one point recently, as Japan’s new Prime Minister Sanae Takaichi’s fiscal stimulus package pushed JGB yields higher. But a JPY recovery may be forming. Apart from increased intervention risks, the Bank of Japan has joined the growing chorus that economic prospects are also improving after weathering US tariffs, aided by sustainable inflation driven by wage gains and imported inflation from the JPY’s weakness. Like France and the UK earlier, Japan’s budget process could be another event risk that ends after the stimulus package gets its final approval at the end of the Diet session on December 17.
For the rest of the year, three event risks will keep USD’s downside bias intact. Around the turn of the year, US President Donald Trump may announce his pick to replace Fed Chair Jerome Powell, whose term ends in May 2026. The Supreme Court may rule that Trump’s use of the International Emergency Economic Powers Act (IEEPA) was unlawful. US government shutdown worries have not gone away because the continuing resolution (CR) passed in November funds most federal agencies only through January 30, 2026.
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“We are the first generation to feel the effect of climate change and the last generation who can do something about it.”
Barack Obama
December 12 in history
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