The U.S. dollar traded largely unchanged on Tuesday as markets waited for the December meeting minutes from the Federal Reserve, which are expected to highlight internal disagreements over the direction of monetary policy in the year ahead.
Foreign exchange markets remained subdued due to thin holiday liquidity, following a difficult year for the dollar that helped lift both the euro and the British pound to their strongest levels since 2017. The euro was last seen near $1.1772, putting it on track for an annual gain of roughly 13.7%, while sterling traded around $1.3509, up about 8% for the year.
The dollar index, which tracks the U.S. currency against a basket of major peers, was hovering close to 98.03, not far from a three-month low. The index was set for a 9.6% annual decline, its steepest drop in eight years, driven by expectations of Federal Reserve rate cuts, narrowing interest rate differentials, and growing concerns over fiscal deficits and political uncertainty.
Investor attention is now firmly focused on the upcoming Fed minutes. Earlier this month, the central bank reduced interest rates but signaled a cautious stance going forward. Within the Federal Open Market Committee, policymakers appear divided on how rates should evolve next year.
Market pricing suggests traders expect two additional rate cuts in 2026, a view that implies further downside risk for the dollar. Analysts at MUFG forecast a 5% decline in the dollar index next year, arguing that U.S. economic performance and monetary policy decisions will remain the primary drivers.
MUFG strategists also anticipate three rate cuts next year, roughly one per quarter through the third quarter, noting that the threshold for easing does not look significantly different from this year.
In Asia, the Japanese yen traded near 156.07 per dollar, edging away from levels that previously triggered strong verbal warnings from Japanese officials and raised concerns about potential intervention. Policymakers at the Bank of Japan have continued to debate the need for further rate hikes following a December increase, underscoring their ongoing focus on inflation risks.
Despite two interest rate hikes this year, the yen remained broadly flat against the dollar in 2025. Investor frustration with the slow pace of tightening has led to a sharp reversal in positioning, with data from the Commodity Futures Trading Commission showing that speculators now hold a small net short position on the currency.
According to Kit Juckes, chief FX strategist at Societe Generale, movements in the dollar-yen pair are increasingly driven by growth expectations rather than interest rate policy. In his view, stronger economic growth is the key factor needed to support the yen.
Elsewhere, the Australian dollar traded near $0.6693, just below a 14-month high, and was on pace for an 8% annual gain, its strongest performance since 2020. The New Zealand dollar stood around $0.5806, set for a 3.7% yearly increase, ending a four-year losing streak.
