US dollar post worst year since 2017 as Fed turmoil, tariffs bite hammered currency

Core Insights - The US dollar experienced its worst annual performance since 2017, ending the year down approximately 8% against a basket of foreign currencies, marking the sharpest annual decline in eight years [1] - Some measures indicate losses closer to 9% to 10%, following a significant first-half drop that erased a decade's worth of gains from the dollar's long bull run [2] - The dollar's decline was exacerbated by President Trump's April "Liberation Day" tariffs, which rattled global markets and raised concerns about lasting damage to US economic growth [2][10] Economic Factors - Core inflation remained near 3%, with tariffs contributing to increased price pressures and pushing consumer inflation expectations higher throughout the summer [3] - Foreign investors began to withdraw, with China reducing its holdings of US Treasuries to the lowest level since 2008, while global asset managers increased hedges against dollar weakness, effectively reducing demand for the currency [3] Federal Reserve Influence - The Federal Reserve's monetary policy uncertainty and the potential succession of Jerome Powell as chair have negatively impacted the dollar [13] - Expectations of further rate cuts by the Fed in 2026 are already priced into the market, undermining the dollar's yield advantage as Treasury yields fell from above 4.5% to near 4.1% by December [10] - The Fed's decision to cut rates in response to rising unemployment and slowing payroll growth marked a significant shift from previous aggressive tightening that had supported the dollar [14]