Dollar closes year with dismal dynamic

[Ben Graham]

Seldom has any US president intervened in the Forex market as much as Donald Trump. Since his election victory in November 2024, Trump trading thrived as the US dollar strengthened. At that time, it was believed that the divergence in economic growth between the United States and other regions would widen due to tariffs. Then came TACO, or "Trump Always Comes Out." Investors realized that the tariffs imposed on Independence Day were a ceiling and would eventually need to be reduced. As a result, the USD index plunged into a wave of sell-offs.

Dynamics of the US dollar since the presidential elections

By initiating a restructuring of the international trade system, Donald Trump turned the fundamental principles of Forex rate formation upside down. As a result, after the Federal Reserve cut the federal funds rate in September and October, the US dollar unexpectedly surged. The yen, on the other hand, weakened after the Bank of Japan raised its overnight rate to its highest level since 1995 in December. The markets were faced with numerous paradoxes and mistakes. But, as is known, mistakes are learning opportunities.

Forex traders recalled fiscal dominance—when a president or government pressures the central bank to lower rates or keep them low to reduce debt servicing costs. In the US, this was done by Donald Trump, while in Japan, it was new Prime Minister Sanae Takaichi. The result was the underdog position of the US dollar and yen among G10 currencies in 2025. Markets penalize for undermining trust. However, while Washington may welcome devaluation, Tokyo is not thrilled by it.

The euro faced plenty of challenges this past year, particularly with French politics. However, while the decline of the US dollar was driven by disappointment, the success of the regional currency was a result of underestimation. Let's remember that in 2025, it entered as an underdog. US tariffs were expected to lead to a slowdown in international trade, which would be disastrous for the export-oriented eurozone and its currency.

Expert Predictions for ECB Deposit Rates

In reality, the currency bloc proved much more resilient to US import tariffs, and the ECB managed to tame inflation. Most Bloomberg experts believe that the ECB has ended its cycle of monetary easing, while the Federal Reserve has not. If that's the case, EUR/USD should continue to rise.

By the end of 2025, everything turned upside down. The euro enters 2026 as a favorite, while the US dollar is now the underdog. Most analysts agree on this outlook. When the market is so heavily saturated with "bulls" in EUR/USD, any positive news from the US or negative news from the eurozone can lead to a sell-off of the main currency pair.

Technically, a Double Top pattern was formed on the daily chart of EUR/USD. A return of the euro to its highs of $1.181 will trigger buy signals. Conversely, a successful breach of support at $1.176 will provide grounds for sales.

The material has been provided by InstaForex Company - www.instaforex.com