Dollar set for worst year since 2017 with Fed drama center stage

Core Viewpoint - The dollar experienced its sharpest annual decline in eight years by the end of 2025, with expectations of further declines if the next Federal Reserve chair implements deeper interest-rate cuts as anticipated [1]. Group 1: Dollar Performance - The Bloomberg Dollar Spot Index decreased by approximately 8% in 2025, with traders anticipating additional weakness [2]. - The dollar's decline was exacerbated by President Trump's tariff implementation in April, and it struggled to recover due to expectations of a dovish successor to Fed Chair Jerome Powell [2]. - The dollar index fell by 1.2% in December, despite a brief rise of 0.2% earlier in the week following positive labor data [4]. Group 2: Federal Reserve Influence - The Federal Reserve's decisions, particularly regarding the new chair after Jerome Powell, will significantly impact the dollar's performance in the first quarter [3]. - Market expectations include at least two rate reductions next year, which diverges from the policy paths of other developed economies, diminishing the dollar's attractiveness [3]. Group 3: Potential Successors to Fed Chair - Trump has indicated he has a preferred candidate to succeed Powell but has not rushed to make an announcement, with Kevin Hassett being a leading candidate [5]. - Other potential candidates include former Fed Governor Kevin Warsh, Fed Governors Christopher Waller and Michelle Bowman, and BlackRock's Rick Rieder [5]. - The market has largely priced in Hassett as the frontrunner, while Warsh or Waller may not be as inclined to implement quick rate cuts, which could be more favorable for the dollar [6].