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Fed minutes expected to show central bank divided on 2026

policy

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Dollar index poised for steepest annual drop in eight

years

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Yen holds recent gains even as intervention worries lurk

By Ankur Banerjee

SINGAPORE, Dec 30 (Reuters) - The U.S. dollar was steady

on Tuesday ahead of the Federal Reserve's release of its

December minutes report, which is expected to reveal divisions

inside the central bank about next year's policy pathway, a

prospect ‌that has left investors on edge.

Currency markets were mostly tranquil due to holiday-thinned

liquidity as traders looked ahead after a dismal year for the

U.S. dollar helped push the euro and sterling to ​their strongest

showings since 2017.

The euro was last at $1.1772, on course for a yearly

gain of 13.7%, while the pound fetched $1.3504 and was

set for ‍an increase of 8% in 2025.

A softer dollar has also pushed the Chinese yuan

to

breach

the psychologically important ⁠7 per U.S. dollar level even

as ⁠the central bank sought to prevent the currency from

overshooting through weaker guidance rates and verbal warnings.

The dollar index, which measures the U.S. currency

against rivals, was poised for a 9.6% annual ‌drop, its steepest

decline in eight years due to Fed rate-cut bets, shrinking

interest ​rate differentials against other currencies and worries

about fiscal deficits and political uncertainty.

The index was at 98.022 on Tuesday, not far from the

three-month low it hit last week.

Investor focus this week will be on the Fed minutes after

the ⁠central bank cut rates earlier this month but cautioned that

they could remain ‍on hold in ​the near term. For next year,

policymakers are split about where rates should go.

Traders are pricing in two more cuts for 2026, suggesting

the dollar has room to decline further.

MUFG strategists expect the dollar index to decline by 5%

next year, noting the ‍greenback is likely to be driven primarily

by the U.S. economy and the direction of monetary policy.

"We see the FOMC cutting rates on three occasions next year

- once per quarter through to Q3. The level of the bar for rate

cuts next year doesn't look that different to this year," they

said in a note.

FRAIL YEN FINDS FOOTING

The Japanese yen last fetched 156.07 per dollar,

inching away from levels that drew severe verbal warnings from

officials in Tokyo and sparked worries about intervention.

Bank of Japan policymakers debated the need to keep raising

interest rates even after a hike ​in December, with ‍one calling

for increases every few months, a summary of opinions showed on

Monday, highlighting their focus on inflationary pressures.

The yen was broadly flat against the dollar in 2025 despite

two rate hikes from the BOJ, one in January and one in December.

Investors ​have been disappointed with the slow and cautious

pace of monetary tightening, with the significant long yen

position in April completely reversing by the end of the year.

Speculators have now got a small short position on the yen, the

latest weekly CFTC data showed.

Kit Juckes, chief FX strategist at Societe Generale, said

the dollar-yen pairing is now more about growth expectations

than monetary policy.

"That is simply another way of saying that what the yen

needs - above all else - is stronger GDP growth," he said.

Last week, Japan's government projected the economy to

expand 1.1% in the current fiscal year that ends in March, up

from a 0.7% growth estimate in August due ​to a

smaller-than-expected hit from U.S. tariffs.

Growth is expected to accelerate to 1.3% in the next

fiscal year as robust consumption and capital expenditures

offset soft overseas demand, according to the projections.

In other currencies, the Australian dollar was at

$0.6693, just below the 14-month high it hit on Monday, on

course for an 8% rise in the year, its strongest performance

since 2020.

The ‍New Zealand dollar fetched $0.5806 and was set

for a yearly gain of 3.7%, snapping a four-year losing streak.