The dollar is set to achieve the largest annual decline in eight years, with downside risks remaining in 2026.

The US dollar is facing its largest annual decline in eight years, with investors saying that if the next Fed chairman chooses to cut interest rates by a larger margin as expected, the dollar will further depreciate. Since the beginning of this year, the US dollar spot index has fallen by about 8%. Following President Trump's announcement of a tariff policy on "Liberation Day" in April, the dollar plummeted, and then continued to be under pressure as Trump actively pushed for the appointment of a dovish person as the next Fed chairman next year. Yusuke Miyairi, a forex strategist at Nomura Securities, said, "The biggest factor affecting the trend of the dollar in the first quarter will be the Fed. This includes not only the meetings in January and March, but also who will succeed Powell as Fed chairman." The market generally expects the Fed to cut interest rates at least twice next year. The policy trajectory in the US is different from that in some developed economies, further weakening the attractiveness of the dollar. Due to mild inflation and the upcoming surge in European defense spending, market expectations for rate cuts by the European Central Bank are close to zero, leading to a sharp rise in the euro-dollar exchange rate. Meanwhile, in Canada, Sweden, and Australia, interest rate traders are betting on hikes. Data from the US Commodity Futures Trading Commission as of the week ending December 16 showed that after a brief bullish trend this month, the dollar has reverted back to the prevalent pessimism since April when concerns about the US economy were sparked by tariffs. Currently, everything revolves around the Fed and who will succeed Powell as his term as chairman ends in May. Trump recently hinted that he has a favored candidate in mind, but is not in a rush to announce it - while also hinting at the possibility of firing Powell. Kevin Hassett, the chairman of the National Economic Council, has long been seen as the most likely candidate, while Trump has also shown interest in former Fed director Kevin Warsh. Fed directors Christopher Waller and Michelle Bowman, as well as Rick Rieder from BlackRock, are also considered as potential candidates. Andrew Hazlett, a forex trader at Monex Inc., said, "Hassett's appointment has more or less been reflected in stock prices as he has been leading for some time, but Warsh or Waller may not support such quick rate cuts, which is good for the dollar."