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

The dollar is poised for its sharpest annual retreat in eight years and investors say more declines are coming if the next Federal Reserve chief opts for deeper interest-rate cuts as expected. 

The Bloomberg Dollar Spot Index has fallen about 8% this year so far. After tumbling in the wake of Donald Trump’s “Liberation Day” tariffs in April, the greenback came under sustained pressure as the president kicked off his aggressive campaign to get a dovish appointee installed as Fed chair next year.

“The biggest factor for the dollar in first quarter will be the Fed,” said Yusuke Miyairi, a foreign-exchange strategist at Nomura. “And it’s not just the meetings in January and March, but who will be the Fed Chair after Jerome Powell ends his term.”  

With at least two rate reductions priced in for next year, the US’s policy path diverges from some of its developed peers, further dimming the dollar’s appeal.

The euro has surged against the greenback as benign inflation and a coming wave of European defense spending keep rate-cut bets close to zero. In Canada, Sweden and Australia, meanwhile, rates traders are wagering on hikes. 

The dollar gauge rose as much as 0.2% Wednesday after Labor Department data showed applications for US unemployment benefits fell last week to one of the lowest levels this year. The greenback index was still on track to finish December down about 1%. 

This month, a brief period of bullish positioning on the dollar reverted to the more pessimistic stance that’s dominated since the April tariffs fueled concerns about the US economy, Commodity Futures Trading Commission data for the week ending Dec. 16 show.

For now, it’s all about the Fed and who steps into replace Jerome Powell, whose term as chair is set to end in May. 

Trump recently teased that he has a preferred candidate, but is in no hurry to make an announcement — while also musing that he might fire the central bank’s current leader.

National Economic Council Director Kevin Hassett has long been seen as the leading candidate, while Trump also expressed interest in former Fed governor Kevin Warsh. Fed governors Christopher Waller and Michelle Bowman and BlackRock’s Rick Rieder are also seen as being in the running. 

“Hassett would be more or less priced in since he has been the frontrunner for some time now, but Warsh or Waller would likely not be as quick to cut, which would be better for the dollar,” said Andrew Hazlett, a foreign-exchange trader at Monex Inc.

This story was originally featured on Fortune.com