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A dismal year for the U.S. dollar is ending with signs of stabilization, but many investors believe the currency’s decline will resume next year as global growth picks up and the Fed eases further. The U.S. dollar slumped more than 9% this year, against a basket of currencies, its worst showing in eight years, driven by expectations of Federal Reserve rate cuts, shrinking interest rate differentials with other major currencies, and as concerns about U.S. fiscal deficits and political uncertainty swirled. Investors broadly expect the dollar to weaken further as other major central banks stand pat or tighten policy and as a new Fed Chair takes chargea change that is expected to herald a more dovish tilt for the central bank. The dollar typically falls when the Fed cuts rates as lower U.S. interest rates make dollar-denominated assets less attractive to investors, reducing demand for the currency. “The reality is we still do have an over-valued U.S. dollar from a fundamental standpoint,” Karl Schamotta, chief market strategist at global corporate payments company Corpay, said. Getting the dollar’s trajectory right is important for investors, given the currency’s central role in global finance. A weaker dollar boosts U.S. multinational earnings by increasing the value of overseas revenues when converted back to dollars, even as it enhances the attractiveness of international markets by providing an FX boost beyond the underlying asset performance. Despite the dollar’s rebound in recent monthsthe dollar index is up 2% from its September lowFX strategists have largely maintained forecasts for a weaker dollar in 2026, a Reuters survey conducted from Nov. 28 to Dec. 3 showed. The dollar’s real broad effective exchange rateits value relative to a large basket of foreign currencies, adjusted for inflationstood at 108.7 in October, down only slightly from a record high of 115.1 in January, showing that the U.S. currency still remains overvalued, according to Bank for International Settlements data. Global growth Expectations for dollar weakness hinge on converging global growth rates with the U.S. advantage expected to narrow as other major economies gain momentum. “I think what’s different is that the rest of the world is just going to grow more next year,” said Anujeet Sareen, portfolio manager at Brandywine Global. Germany’s fiscal stimulus, China’s policy support, and improved growth trajectories in the euro zone are expected to reduce the U.S. growth premium that has supported the dollar in recent years, investors said. “When the rest of the world is starting to look better in terms of growth, that’s favorable for the dollar to continue to weaken,” Paresh Upadhyaya, director of fixed income and currency strategy at Amundi, the biggest European asset manager, said. Even investors who believe the worst of the dollar’s decline is over say any major hit to U.S. growth could weigh on the currency. “If you see any weakness at any point next year, that could probably be bad for markets, but that could definitely affect the dollar too,” said Jack Herr, investment analyst at mutual fund company GuideStone Funds, who doesn’t foresee major further dollar depreciation as his base case for 2026. Central Bank divergence Expectations for the Fed to continue cutting rates even as other major central banks hold rates or hike could also weigh on the dollar. A sharply divided Fed cut interest rates in December, with the median policymaker view for next year calling for one more quarter-of-a-percentage-point cut. With Jerome Powell set to step aside for President Trump’s next Fed chair appointment, the market may also price in a more accommodative central bank next year, given Trump’s push for lower rates. Several of the known finalists for the Chair position, including White House economic adviser Kevin Hassett, former Fed Governor Kevin Warsh and current Fed Governor Chris Waller, have advocated for interest rates to be lower than they are now. “Although the market expects limited action from the Federal Reserve next year, we believe the trend is toward lower growth and weaker employment,” Eric Merlis, co-head of global markets, Citizens in Boston, who said they are short the U.S. dollar relative to other G10 currencies. Meanwhile, traders reckon the European Central Bank will keep rates steady in 2026, though a rate hike is not completely ruled out. The ECB kept its policy rates steady at its December meeting and revised upwards some of its growth and inflation projections. Not a straight line Longer-term views for dollar weakness notwithstanding, a near-term rebound for the dollar is not to be ruled out, investors cautioned. Continued investor enthusiasm around artificial intelligence and the resulting capital flows into U.S. equities could provide near-term support for the dollar. The boost to U.S. growth stemming from the reopening of the government after this year’s shutdown and from the tax cuts passed this year, could lift the dollar in the first quarter, Brandywine’s Sareen said. “But we’re inclined to think that that’s not likely a sustained driver of the dollar for the year,” he said. Saqib Iqbal Ahmed, Reuters
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The average rate on a 30-year U.S. mortgage fell to its lowest level of 2025 this week, an encouraging sign for prospective home buyers. The average long-term mortgage rate dipped to 6.15% from 6.18% last week, mortgage buyer Freddie Mac said Wednesday. That’s the lowest average long-term rate since October 3, 2024, when it dipped to 6.12% before shooting back up. One year ago, the rate averaged 6.91%. Borrowing costs on 15-year fixed-rate mortgages, popular with homeowners refinancing their home loans, fell this week to 5.44% from 5.50% the previous week. A year ago, it averaged 6.13%, Freddie Mac said. Mortgage rates are influenced by several factors, from the Federal Reserves interest rate policy decisions to bond market investors expectations for the economy and inflation. They generally follow the trajectory of the 10-year Treasury yield, which lenders use as a guide to pricing home loans. The 10-year yield was at 4.14% at midday Wednesday, down a touch from last weeks 4.15%. The average rate on a 30-year mortgage has been mostly holding steady in recent weeks since Oct. 30 when it dropped to 6.17%, which at the time was its lowest level in more than a year. Mortgage rates began easing in July in anticipation of a series of Fed rate cuts, which began in September and continued this month. The Fed doesnt set mortgage rates, but when it cuts its short-term rate that can signal lower inflation or slower economic growth ahead, which can drive investors to buy U.S. government bonds. That can help lower yields on long-term U.S. Treasurys, which can result in lower mortgage rates. Even so, Fed rate cuts dont always translate into lower mortgage rates. Home shoppers who can afford to pay cash or finance at current mortgage rates are in a more favorable position than they were a year ago. Home listings are up sharply from 2024, and many sellers have resorted to lowering their initial asking price as homes take longer to sell, according to data from Realtor.com. Still, affordability remains a challenge for aspiring homeowners, especially first-time buyers who dont have equity from an existing home to put toward a new home purchase. Uncertainty over the economy and job market are also keeping many would-be buyers on the sidelines. Sales of previously occupied U.S. homes rose in November from the previous month, but slowed compared to a year earlier for the first time since May despite average long-term mortgage rates holding near their low point for the year. Through the first 11 months of this year, home sales are down 0.5% compared to the same period last year. Economists generally forecast that the average rate on a 30-year mortgage will remain slightly above 6% next year. Matt Ott, AP business writer
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U.S. stocks are slipping in afternoon trading Wednesday as Wall Street closes out a banner year for markets driven by both optimism and uncertainty. The S&P 500 was down 0.2%. The Dow Jones Industrial Average fell 100 points, or 0.2%, as of 1:47 p.m. Eastern time. The Nasdaq composite fell 0.1%. The stock indexes are coming off a three-day losing streak. Trading is expected to be light ahead of the New Years Day holiday, when markets will be closed. With just one trading day left before the year ends, most big investors have closed out their positions for the year and trading volume has been very thin. Even after their mini post-Christmas pullback, the indexes are on pace for strong gains for the year. The S&P 500, which set 39 record highs in 2025, is up about 17% for the year, its third straight double-digit annual gain. The Nasdaq is up 21.1% and the Dow has gained 13.4%. Wall Streets 2025 gains came as investors embraced the optimism surrounding artificial intelligence and its potential for boosting profits across almost all sectors. But the market had no shortage of turbulence along the way amid President Donald Trumps on-again, off-again tariffs on imported goods worldwide and uncertainty over the trajectory of interest rates. The S&P 500 plunged nearly 5% on April 3, its worst day since the 2020 COVID crash. It fell another 6% a day later, after Chinas response raised fears of an escalating trade war. Worries also gripped the U.S. Treasury market. Trump eventually put his tariffs on pause and negotiated agreements with countries to lower his proposed tariff rates on their imports, helping calm investors nerves. Strong profit reports from companies and three cuts to interest rates by the Federal Reserve also helped drive markets higher. Still, the AI frenzy that drove markets in 2025 did not come without concerns. Chief among them is the worry that artificial intelligence technology may not produce enough profits and productivity to make all the investment worth it. That could keep the pressure on AI stocks like Nvidia and Broadcom, which were responsible for much of the markets gains this year. And its not just AI stocks that critics say are too pricey. Stocks across the market still look expensive after their prices climbed faster than profits. On top of concerns that stocks are overvalued, the ongoing impact of the wide-ranging U.S.-led trade war threatens to add more fuel to inflation in the U.S. Despite the Fed cutting rates over concerns about the labor market, inflation remains solidly above the central banks 2% target. Wall Street is betting that the Fed will hold interest rates steady at its next meeting in January. Traders got an update on the state of the job market Wednesday. The Labor Department reported that fewer Americans applied for unemployment benefits last week with layoffs remaining low despite a weakening labor market. All of the sectors in the S&P 500 were in the red Wednesday, with technology stocks among the biggest drags on the market. Western Digital fell 2.1% and Micron Technology was down 1.5%. Treasury yields were mostly higher in the bond market. The yield on the 10-year Treasury rose to 4.16% from 4.13% late Tuesday. The yield on the two-year Treasury, which moves more closely with expectations for what the Federal Reserve will do, rose to 3.47% from 3.45%. Trading in precious metals continued to be volatile as the year winds down. Silver swung back to a big loss, giving back 9.1% after Tuesday’s gain of more than 10%. Following Friday’s 7.7% jump, silver lost nearly 9% on Monday. It’s still up more than 140% this year. Gold was down 1.2%, but is still up about 64% in 2025. U.S. benchmark crude slipped 0.7% to $57.55 per barrel. The price of Brent crude, the international standard, fell 0.6% to $60.97 per barrel. Global stock markets including those in Germany, Japan and South Korea were closed Wednesday for the New Years holidays, while trading was mixed in those that remained open. Alex Veiga, AP business writer
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