2025 foreign exchange review: Weak dollar, reversed yen, strong euro

# Source: Wall Street Insights

## By Zhang Yaqi

The US dollar closed 2025 with a sharp 9.5% plunge, marking its worst performance in eight years; the euro and British pound both strengthened. The Japanese yen was an exception due to the slow pace of monetary tightening, with bullish positions completely reversing by the end of the year, erasing its gains and leaving it flat for the full year. Looking ahead to 2026, amid doubts over the Federal Reserve's independence and global economic growth, the dollar's weak trend may persist, and non-US currencies as well as commodity currencies are expected to continue their ascent.

The 2025 foreign exchange market concluded with notable US dollar weakness, as the currency suffered its biggest annual decline since 2017.

The latest market dynamics show that the US Dollar Index plummeted 9.5% for the year, hitting an eight-year low. On the final trading day of 2025, the index hovered around 98.228, but its overall downward trend was irreversible. Against the backdrop of the dollar's weakness, non-US currencies staged a full-scale rebound. The euro and British pound led the gains with annual increases of 13.5% and 7.6% respectively, both notching their best annual performances in eight years.

The Japanese yen stood out as the sole exception. Despite two interest rate hikes by the Bank of Japan during the year, the slow pace disappointed investors. A large number of yen bullish positions established in April were fully reversed by the end of the year, causing the yen to give up its potential earlier gains and fail to benefit from the dollar's slump.

Market concerns over the Federal Reserve's independence further amplified pressure on the dollar. With Donald Trump announcing plans to nominate a new Federal Reserve Chair in January next year to replace Jerome Powell, whose term expires in May, policy uncertainty rose significantly. According to data from the US Commodity Futures Trading Commission (CFTC), the market has maintained a net short position on the dollar since April this year, reflecting investors' sustained pessimism about the dollar's outlook.

Looking ahead to 2026, analysts widely believe that the dollar's weakness is likely to continue. Goldman Sachs strategists pointed out that against the backdrop of steady global economic growth, Fed rate cuts and unchanged policies from other central banks, the dollar will probably weaken further. This will not only underpin the strength of the euro and British pound, but also provide breathing room for emerging market currencies.

### Clouds Loom Over the Dollar's Outlook

The dollar's poor performance in 2025 stemmed mainly from dual pressures of macro policies and the political environment. In addition to the start of the rate cut cycle, market worries over expanding US fiscal deficits and Trump's tariff policies lingered. Prashant Newnaha, senior Asia-Pacific interest rate strategist at TD Securities, said that the rationale for shorting the dollar remains valid in 2026, and trades that short the dollar against the euro and Australian dollar are expected to continue performing well.

Although the minutes of the Fed's December meeting showed divisions among policymakers over rate cuts, which briefly provided support to the dollar, they did not alter long-term expectations. Current trader pricing indicates that the market expects two Fed rate cuts in 2026, higher than the central bank's own projection of one. Goldman Sachs added in a report that if the labor market shows signs of recession or the pace of rate cuts deepens, the dollar's decline could intensify further.

### Japanese Yen: Reversal Expectations After Missing the Opportunity

The Japanese yen was one of the few currencies in 2025 that failed to capitalize on the dollar's weakness to register gains. Despite two interest rate hikes by the Bank of Japan in January and early December respectively, investors were disappointed by the slow and cautious pace of monetary tightening. A large number of yen bullish positions in the market in April were fully reversed by the end of the year, a reversal that caused the yen to give up its gains and end the year roughly flat.

On Wednesday, the USD/JPY exchange rate stabilized around 156.35, a level that still triggers intervention concerns and verbal warnings from Tokyo officials. Strategists at MUFG believe that as 2026 approaches, conditions for a correction in USD/JPY may ripen. With US yields declining, the yen's safe-haven status is expected to recover. The institution predicts that if market momentum shifts, the yen is likely to rebound to the 146 level against the dollar in the fourth quarter of 2026.

### European and Commodity Currencies Stage a Strong Rally

The winners in the 2025 forex market were mainly concentrated in European currencies and commodity currencies. EUR/USD hovered around 1.1747 at the end of the year, and GBP/USD stood at 1.3463. Their strong gains were largely driven by broad-based dollar weakness. Meanwhile, commodity currencies also performed well. The risk-sensitive Australian dollar is expected to surge more than 8% for the year, marking its best annual performance since 2020; the New Zealand dollar, although with a smaller gain, also recorded an annual rise of 3.4%, ending a four-year losing streak.

Domestically, the onshore yuan broke above the key 7.0 level against the dollar yesterday, hitting an intraday high of 6.9960, the highest since May 17, 2023. Earlier, the offshore yuan had breached this closely watched psychological level on December 25. Market participants expect the yuan to have further room for appreciation, supported by capital inflows and expectations of economic recovery.

As 2026 draws near, the market widely anticipates that this currency rotation pattern dominated by dollar weakness will persist.

### Risk Warning and Disclaimer

The market is risky and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situations or needs of individual users. Users should consider whether any opinions, views or conclusions in this article are consistent with their specific circumstances. Any investment made based on this article shall be at the user's own risk.

需要我帮你整理这份译文中的**核心数据对比表**，把各主要货币2025年的涨跌幅和关键预测清晰列出来吗？