• 2025 FX narrative: Markets oscillated between “US Exceptionalism” (policy divergence, relative growth strength) and “US Debasement” (fiscal expansion, trade uncertainty), leaving the US dollar volatile but broadly weaker on the year.
• Dollar performance: The US Dollar Index fell sharply in H1 2025, partially recovered on policy divergence in Q3, then resumed a sideways-to-lower trend after the Fed turned dovish at Jackson Hole and restarted rate cuts.
• Policy divergence mattered: A cautious Fed versus a more dovish ECB/BoE initially supported USD, while weak BoJ normalisation and commodity-bloc shocks shaped JPY, AUD, NZD, and CAD performance.
• Liquidity is turning negative for USD: The end of QT and renewed Treasury bill purchases are lifting US net liquidity, historically a headwind for the US dollar into 2026.
• Macro backdrop for 2026: Improving global growth and a narrowing US Treasury yield premium increase downside risks for the USD as capital rotates toward non-US assets.
• Key FX setups: EUR/USD shows signs of resuming its major uptrend, AUD/USD has broken out from long-term resistance, while USD/JPY risks a bearish reversal from the top of its multi-year range.

The defining narrative in the foreign exchange market for 2025 is a tug of war between "US exceptionalism – US dollar strong" and “US debasement – US dollar weak”.

At the start of 2025, the consensus was skewed towards predictions for a collapse of the US dollar due to the new Trump administration’s aggressive fiscal policies of deep corporate tax cuts, leading to a further widening of the US budget deficit, which in turn increases the odds of a spike in longer-term US Treasury yields (lesser demand for US sovereign fixed income instruments), which eventually weaken the US dollar; that formed a significant thesis of the “US debasement” trade narrative.

Secondly, the erratic trade policy implementation by US President Trump had confused the global markets with the “US debasement” narrative, reinforced by the announcement of Trump’s “Liberation Day” tariffs on 2 April 2025. This indirectly created a growing sense of concern among market participants that the Trump administration may “deliberately” weaken the US dollar to boost US exports’ competitiveness within the aim of the administration to transform the US into a global manufacturing powerhouse of high tech products.

In the process, the US Dollar Index plummeted by 11.5% in the first half of 2025 (from 1 January to 1 July) (see Fig. 1). Thereafter, the US dollar weakness was halted as “US exceptionalism” was brought back to the forefront in the FX market due to monetary policy divergences between the Fed and the other developed nations’ central banks.

Stretching into the third quarter of 2025, the monetary policy guidance offered by the Fed was a “wait and see” approach due to a sticky inflation trend and a still robust services industry in the US economy. In contrast, the ECB and BoE offered a more dovish monetary policy guidance as the Eurozone faced an existential crisis of confidence as the German industrial engine sputtered, and the UK grappled with a stagflationary environment.

The commodity bloc, currencies traditionally leveraged to global growth, had suffered a severe terms-of-trade shock (US-China geopolitical tensions) that weakened the Canadian dollar (CAD), Australian dollar (AUD), and New Zealand dollar (NZD).

In addition, the Japanese yen (JPY) has stayed weak despite domestic inflation holding above 2%, constrained by the Bank of Japan’s inability to normalise policy decisively amid political and administrative gridlock.

Against this backdrop and a resurgence of the “US exceptionalism” narrative, the US Dollar Index pared its year-to-date losses from 11.5% to 8.4% between 1 July and 31 July (see Fig. 2).

However, this momentum reversed on 22 August 2025, when the Fed’s earlier “wait-and-see” guidance shifted decisively dovish after Chair Powell, speaking at the Jackson Hole Symposium, warned that a weakening US labour market could threaten US economic growth.

Thereafter, the US Dollar Index resumed its decline but was unable to break the low established on 1 July and traded sideways, ending with a year-to-date loss of 9.9% as of 12 December 2025 due to the current balanced monetary policy guidance offered by the Fed despite resuming its interest rate cut cycle in September 2025 with three interest cuts of 25 basis points (bps) each so far to lower the Fed funds rate to 3.5%-3.75% from 4.25%-4.5%.

Below is a summary table highlighting the 2025 performance of key currencies and their main drivers.

Next, we break down the key macro forces that are likely to impact the US dollar in general in 2026 and three currency pairs to take note of from a technical analysis perspective.

The World Citigroup Economic Surprise Index has continued to trend higher to record a 20-month high of 26.80 as of 11 December 2025. When the index is greater than zero, it means that overall global economic performance is generally better than expected (see Fig. 3).

Hence, an up-trending World Citigroup Economic Surprise Index suggests a potential improvement in global economic growth prospects, which can drive more capital allocation towards non-US assets, in turn, putting downside pressure on the US dollar in 2026.

Secondly, improving global growth prospects could prompt other developed-market central banks, such as the ECB, RBA, and BoC, to pause their respective rate-cut cycles, potentially exerting upward pressure on their sovereign bond yields.

Hence, the US Treasury yield premium (the positive difference between US Treasury yields and other nations’ sovereign bond yields) may further reduce heading into 2026, creating a negative feedback loop into the US dollar.

The US Dollar Index has shown a strong positive correlation with the yield spread between 2-year and 10-year US Treasuries over an equal-weighted basket of sovereign bonds from seven major economies: Germany, the UK, Japan, Canada, Switzerland, Australia, and China (see Fig. 4).

The US Net Liquidity Indicator, which is derived from subtracting the US Fed’s balance sheet (liquidity inflow) from the sum of the US Treasury general account (liquidity outflow) and the US Fed overnight reverse repurchase agreements (liquidity outflow), can be a gauge to measure liquidity conditions in the US financial system.

Also, the US Net Liquidity Indicator exhibits an indirect correlation with the US dollar (or a direct correlation with the inverse of the US dollar).

In short, improving liquidity conditions, signalled by a rising US Net Liquidity Indicator, tend to weaken the US dollar, while deteriorating liquidity, reflected by a falling indicator, typically supports dollar strength.

As seen in Fig. 5, the US Net Liquidity Indicator rose during the COVID period from February 2020 to December 2021, which also saw the inverse of the US Dollar Index trend upwards (the US dollar weakened) over the same period.

The Fed announced in early May 2022 that it would shrink its balance sheet to kick-start its second Quantitative Tightening (QT) programme in June 2022. Before the announcement, the US Net Liquidity Indicator had started to trend downwards from December 2021 to April 2022, in turn creating a rebound in the US dollar from December 2021 to September 2022 (the inverse of the US Dollar Index trended downwards).

The Fed’s second round of quantitative tightening has kept the US Net Liquidity Indicator largely range-bound since June 2023, which in turn has left the US Dollar Index confined to a choppy, upward-sloping trading range over the same period.

Interestingly, the Fed has announced the end of its QT programme during the 29 October 2025 FOMC meeting to be effective on 1 December 2025 and surprised market participants with an announcement of its restarting its Treasuries buyback activities via the reverse management programme at the last FOMC meeting on 10 December 2025 to commence on 12 December 2025 via the purchase of US$40 billion worth of short-term US Treasury bills per month.

The US Net Liquidity Indicator has started to rebound from its key range bottom of US$5.58 trillion on the week of 27 October 2205 to US$5.68 trillion as of 12 December 2025, which also saw a parallel weakening of the US Dollar Index (inverse of the US Dollar Index increased).

Hence, a continuation of the latest Fed’s reverse management programme to buyback US Treasury bills may see a further up move in the US Net Liquidity Indicator, in turn, putting potential downside pressure on the US Dollar Index.

The 5-month sideways movement of the EUR/USD from June 2025 to early December 2025 is considered a potential consolidation within a three-year major uptrend phase since its 28 September 2022 low, rather than the start of a major topping process.

The recent price actions of the EUR/USD have managed to stage a rebound after a close retest at the key 200-day moving average (1.1470) and reintegrated back above the 50-day moving average in early December 2025 (see Fig. 6).

In addition, the weekly RSI momentum indicator has also staged a corresponding rebound after a retest at its 50 level, which suggests a potential reemergence of upside momentum for the EUR/USD.

Watch the long-term secular support of 1.1230 on the EUR/USD, and a clearance above 1.1940 sees the next major resistances coming at 1.2270 and 1.2540.

On the flipside, failure to hold at 1.1230 invalidates the bullish bias for a deeper corrective decline to expose the next major supports at 1.0940 and 1.0495 (the lower boundary of the long-term secular ascending channel).

The AUD/USD has managed to clear above a major hurdle after 4 months of choppy range consolidation from July 2025 to November 2025 (see Fig. 7).

After a retest on its key 200-day moving average in late November 2025, the AUD/USD staged a major bullish breakout the week of 1 December 2025, with a weekly close above a former long-term secular descending trendline resistance from the February 2021 swing high, which now turns pull-back support at 0.6605.

The weekly MACD trend indicator reinforces the AUD/USD’s major bullish breakout, having produced a bullish crossover above its centreline, signalling a potential shift from a sideways phase into a sustained uptrend.

Watch the 0.6400 key long-term pivotal support on the AUD/USD, and a clearance above 0.6700 sees the next major resistances coming in at 0.6940 and 0.7140 in the first step.

However, a break and a weekly close below 0.6400 invalidates the bullish tone for a resumption of the choppy corrective decline phase to retest the next major support zone of 0.5990/0.5810 (COVID period swing low of March 2020)

Since hitting a 38-year high of 161.95 in July 2024, the USD/JPY has been trapped in a wide sideways range of 15%.

The USD/JPY hit the bottom of the range at 140.25 at the end of April 2025 (ex-post US President Trump’s “Liberation Day” tariffs announcement) and drifted upwards towards the upper boundary of the major sideways range in the second half of 2025

Right now, it is coming to the tail end of the upper boundary of the major range, with the weekly RSI momentum indicator shaping a bearish reaction at its descending resistance that coincides with its overbought region.

These observations suggest that the multi-month up move of the USD/JPY from April 2025 to November 2025 is losing upside momentum, which increases the odds of a bearish reversal back towards the middle part of the range in the first step (see Fig. 8).

Watch the 161.95 key long-term secular resistance on the USD/JPY, with the medium-term support zone coming in at 148.65/145.85 (also the 200-day moving average). A break below 145.85 exposes the major range support zone of 140.25/137.35.

On the other hand, a clearance with a weekly close above 161.95 invalidates the bearish reversal scenario for the continuation of its major bullish impulsive up move sequence towards the next major resistance of 170.70 in the first step.

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