US dollar set for biggest annual drop since 2017 amid Fed rate cuts

The US dollar is on track for its steepest annual decline since 2017, having fallen 9.5% against a basket of major currencies this year, as Wall Street banks predict further weakness in 2026.

Analysts attribute the slide to aggressive interest rate cuts by the Federal Reserve, combined with the lingering effects of President Donald Trump’s trade war, according to The Financial Times.

The euro has emerged as the top performer, climbing nearly 14% against the dollar to over $1.17, a level last seen in 2021. The pound has also strengthened, currently trading at $1.33.

“The Fed is bucking the trend in terms of global central banks . . . it is still very much in easing mode,” said James Knightley, chief international economist at ING. Traders expect two or three quarter-point cuts from the Fed by the end of 2026, while other central banks, including the European Central Bank, are holding or raising rates.

The dollar’s weakness has benefited US exporters but hurt European companies earning revenue in the US. Its trajectory next year may also hinge on Trump’s choice for Fed chair, with concerns that a more “interventionist” Fed could accelerate rate cuts, further weighing on the currency.

Despite a recent 2.5% rebound from September lows, the dollar faces structural challenges, as foreign investors increasingly hedge their exposure to the currency amid continued uncertainty over US policy.

By Vugar Khalilov