Dollar Steady Ahead of Fed Minutes as China’s Yuan Breaches Key Level
By Dhara Ranasinghe and Ankur Banerjee, December 30, 2025
The U.S. dollar remained steady on Tuesday as financial markets awaited the release of the Federal Reserve’s minutes from its December policy meeting. Meanwhile, China’s yuan strengthened, breaking through a significant psychological barrier against the dollar for the first time in two and a half years, a movement attracting considerable attention from currency traders worldwide.
Dollar Poised for Sharp Annual Decline Amid Fed Uncertainty
The Federal Reserve minutes are anticipated to reveal a divided central bank regarding its monetary policy outlook for 2026. The Fed’s decision to cut interest rates in December has sparked speculation about further easing, with markets currently pricing in two additional rate cuts over the coming year.
This sentiment has weighed on the U.S. dollar, which is on track to endure its worst annual performance since 2017, sinking nearly 10% in 2025. The dollar index—a measure of the greenback’s value against a basket of major currencies—was last quoted at 98.03, hovering near recent three-month lows. This reflects the influence of Fed rate-cut expectations, narrowing interest rate differentials with other currencies, alongside growing concerns over the U.S. fiscal deficit and political uncertainties.
MUFG strategists forecast the dollar index could decline by an additional 5% next year, emphasizing the U.S. economy’s performance and the trajectory of monetary policy as key determinants. However, some analysts point to the dollar’s recent stabilization, noting limited room for further rate reductions.
Guy Miller, Chief Market Strategist at Zurich Insurance Group, commented, “We think the dollar is going to range trade around current levels versus the key crosses. We’ve pretty much moved sideways since the summer period, certainly against the Swiss franc and the euro.”
Euro and Sterling Set for Strong Annual Gains
In contrast to the dollar’s decline, the euro and the British pound have both enjoyed substantial yearly increases. The euro stood at $1.1767, representing a nearly 14% rise in 2025, while sterling traded at $1.3508, poised for an 8% gain. These gains reflect differing economic conditions and monetary policy stances within the Eurozone and the UK compared to the U.S.
Yuan Breaks Through Psychological Threshold
The Chinese yuan’s advance against the dollar has been particularly notable. The onshore yuan slipped below the psychologically important level of 7 per dollar, trading at 6.9951—the strongest point since May 2023. This breaks a three-year losing streak for the yuan and represents an approximate 5% appreciation since early April amid a weakening dollar backdrop.
China’s central bank has attempted to moderate the yuan’s rapid appreciation through softer currency guidance and public warnings in the state media. Nevertheless, these efforts have failed to halt the currency’s strengthening trend, which is partly driven by exporters rapidly selling dollars as the year closes.
Japanese Yen and Broader Asia-Pacific Currency Dynamics
The Japanese yen was relatively stable, trading at 155.96 per dollar, edging away from levels that had previously triggered verbal intervention warnings from Tokyo officials. The Bank of Japan is continuing to debate its monetary policy path, with policymakers discussing whether to maintain periodic interest rate hikes to tamp down persistent inflation.
An expert perspective from Kit Juckes, Chief FX Strategist at Societe Generale, highlights growth prospects as a pivotal factor for the yen-dollar pairing: “What the yen needs—above all else—is stronger GDP growth.” Japan’s government recently revised its fiscal year growth projections upward to 1.1% from 0.7%, attributing the improvement to less severe impacts from U.S. tariffs. The outlook anticipates growth accelerating to 1.3% next fiscal year, fueled by robust domestic consumption and capital expenditures despite soft external demand.
Market Outlook Amid Thin Liquidity
The approaching New Year holidays have led to thinner market liquidity, contributing to cautious trading sentiment as participants weigh the prospects for the dollar and other major currencies. The Federal Reserve’s upcoming minutes will be closely scrutinized for clues on the future monetary policy path and its implications for global currency markets.
Reporting by Dhara Ranasinghe in London and Ankur Banerjee in Singapore; Editing by Barbara Lewis
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