The U.S. dollar is on track to finish 2025 with its worst performance in eight years and further rate cuts could spur even more weakness. The U.S. Dollar Index (DXY), which tracks the dollar against a basket of other currencies, has shed 9.6% year-to-date.
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Rate cuts are generally bad news for the dollar, as they reduce the yield on U.S. assets and make them less attractive to investors. Lower rates can also lead to less demand for the greenback. Additionally, the start of the U.S. rate-cutting cycle comes as many other central banks around the globe wrap up their respective easing cycles.
Options Imply Further Pain for the U.S. Dollar
More downside could be on the way, as options pricing data shows that traders are the most bearish on the dollar in three months.
“The dollar outlook remains comfortably negative,” wrote Swissquote Senior Analyst Ipek Ozkardeskaya. “Bullish calls on the dollar are rare.” Ozkardeskaya added that the dollar has been hampered by U.S. debt concerns and geopolitical tensions. At the same time, she noted that the dollar could turn higher if the Fed takes on a hawkish approach to rates.
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