The US dollar plummeted 9.4% in 2025, hitting a nine-year low. Can the rebound signal continue?

2025 was dubbed the “darkest hour” for the US dollar. The US Dollar Index (DXY) declined by 9.37%-9.4% throughout the year, marking the worst annual performance since 2017. It slid from a high of around 110 at the beginning of the year to close near 98.2 at year-end, with a low of 96.2 during the period. Entering 2026, the dollar edged slightly higher on the first trading day, but whether this rebound can sustain warrants in-depth analysis of the underlying logic.

Why the US Dollar Is in Its “Darkest Hour”

Dollar weakness is not an isolated event but the result of multiple pressures stacking up. According to the latest information, the main drivers of USD depreciation in 2025 include:

• Aggressive Federal Reserve Rate Cuts: The Fed cut rates by a total of 75 basis points in 2025, signaling clear easing. In contrast, other major central banks adopted a more cautious pace, reducing the dollar’s relative attractiveness.
• Concerns Over Trump’s Tariff Policies: Market expectations regarding Trump’s tariff policies are highly uncertain, undermining the dollar’s reputation as a “safe haven.”
• Fiscal Deficit Pressures: The US national debt exceeds $37 trillion, and high fiscal deficits exert long-term credit pressure on the dollar.
• Central Bank Independence Concerns: The Federal Reserve faces political pressure; Powell’s term ends in May 2026, and Trump has indicated plans to replace him with a more dovish successor. This uncertainty also weighs on the dollar.

These factors collectively lead investors to diversify their safe-haven dollar holdings and increase hedging operations against USD depreciation risks.

Technical Outlook Shows Weak Rebound

From a technical perspective, the dollar’s rebound lacks a solid foundation. According to the latest trading data, DXY is at 98.18. Although there was a rebound on January 2, 2026, several signals warrant caution:

Compared with the historical trend of 2017-2018, when the dollar also experienced a similar decline cycle—dropping 15% from its January 2017 high to February 2018—if this pattern repeats this year, the USD could continue to face downward pressure.

Key Points for USD Trends in 2026

Looking ahead to 2026, the dollar’s outlook presents a clear duality. Market pricing suggests the Fed is expected to cut rates by another 50 basis points in 2026, implying the easing cycle may continue. Under this expectation, the dollar is likely to remain volatile and generally weaken, with a core trading range around 95-101.

However, the real variables include:

• Inflation Trends: If employment data for January-February remains weak and inflation stabilizes around the 2.5% threshold, the Fed might accelerate rate cuts, further weakening the dollar.
• Policy Uncertainty: The choice of the new Fed Chair will influence policy directions in the second half of 2026, representing the biggest current variable.
• Global Central Bank Movements: Policy adjustments by other major central banks will also impact the dollar’s relative strength.

Impact on the Cryptocurrency Market

A weakening dollar is a double-edged sword for crypto markets. On the surface, USD depreciation makes USD-denominated assets like Bitcoin appear cheaper, potentially attracting international capital inflows. But the more critical aspect is the cause of the weakness:

• If the dollar weakens due to a healthy economic cycle, it could be positive for crypto markets.
• If it weakens because of compromised Fed independence or aggressive easing for political reasons, it could trigger inflation fears and credit concerns, which might harm all risk assets, including cryptocurrencies.

From on-chain fund flows, institutional investors have begun hedging USD risks in US stocks, and some seeking alternative allocations may shift toward cryptocurrencies. However, the strength and sustainability of this flow ultimately depend on the underlying drivers of USD depreciation.

Summary

The sharp decline of the USD in 2025 reflects profound macroeconomic shifts—from the era of a “strong dollar” to a more diversified asset allocation. Although the dollar showed a rebound on the first trading day of 2026, this rebound lacks lasting momentum. Markets should expect the dollar to continue its long-term weakness but remain alert to potential reversals and policy uncertainties. For crypto market participants, the key is to distinguish whether the dollar’s weakness is driven by “healthy” or “unhealthy” factors and adjust their allocation strategies accordingly.