Dollar Nears Worst Year Since 2003; Rouble Slips!!

Introduction

Late-December developments have shifted the torque across FX desks: the U.S. dollar is tracking its steepest annual decline in more than two decades as markets price in Federal Reserve easing, and Russia’s central bank has announced a material reduction in daily foreign-exchange sales that removes a significant support for the rouble. These two stories — one broad and one country-specific — will shape carry, flow and volatility dynamics as traders position for 2026.

Dollar Under Pressure: Drivers and Dynamics

Why the dollar has weakened

Through December the dollar has fallen sharply versus a range of developed currencies. Key drivers include growing market expectations for Fed rate cuts next year (analysts and market-implied curves point to easing in 2026), a perception of rising political pressure around U.S. monetary policy, and divergent central-bank trajectories where the ECB and some other banks either pause or end easing while the Fed is expected to lower rates.

Which currencies have benefited

The euro, sterling and several commodity currencies have outperformed. The euro’s notable gains reflect an upgraded ECB outlook and a reduced likelihood of ECB easing, while the pound and Australian and New Zealand dollars have benefited from relatively tighter rate paths. The yen remains a special case: despite a recent BoJ move, the currency’s reaction has been muted and intervention risk from Japanese authorities continues to add asymmetric volatility to JPY pairs.

Implications for FX strategies

With the dollar’s downside momentum, cross and commodity pairs have seen elevated flows. Traders should weigh three considerations: the timing and magnitude of Fed cuts (consensus is not unanimous), the durability of rate divergence across developed central banks, and geopolitical or policy shocks that can temporarily reverse trends. Positioning that assumes a steady unwind of dollar strength may work, but risk management is crucial given the potential for rapid policy or intervention surprises.

Bank of Russia Cuts Daily FX Sales: Rouble Consequences

What changed

The Bank of Russia announced a reduction in its daily foreign-exchange sales program, roughly halving the central bank’s direct supply to the FX market. The move reduces an active source of rouble liquidity that had helped keep the currency stronger through 2025. The change takes effect in January and follows pressure from exporters and shifting fiscal choices amid lower energy revenues.

Market reaction and outlook for the rouble

Initial market reaction was muted, but the removal of sizeable daily official FX sales is a structural negative for the rouble. Fewer scheduled sales reduce state-created demand-supply imbalances that had supported the currency. Economists and FX strategists now see a higher probability of rouble depreciation if energy receipts remain weak or if domestic borrowing becomes the default fiscal route. Short-term volatility could stay contained, but the balance of risk has shifted toward downward pressure on the rouble.

Practical consequences for traders and corporates

Exporters who had suffered from an overly strong rouble may see relief if depreciation occurs, but importers and foreign-currency debtors will face renewed FX costs. For traders, RUB pairs may offer directional opportunities, but liquidity and sanction-related tail risks remain significant. Hedging horizons should be reassessed: reducing reliance on predictable central-bank actions and increasing contingency buffers is prudent.

Cross-Cutting Themes and Trade Considerations

Volatility and intervention risk

Both stories increase the chance of episodic volatility. Dollar weakness is often punctuated by risk-off episodes that reverse flows quickly, while the rouble’s new structural vulnerability could provoke ad-hoc responses from Russian authorities if movements become disorderly. For currencies like JPY, persistent intervention talk keeps skewed option premia and sudden moves possible.

Construction of a resilient FX stance

Risk-aware approaches include: scaling positions, staggering entry levels, using options for asymmetric exposure, and pairing directional views with macro event calendars (Fed meetings, BoE/ECB commentary, Russian fiscal announcements). Correlation management is also important: commodity prices, especially oil and gas, remain a key driver of FX flows tied to resource exporters.

Conclusion

The dollar’s slide toward its worst annual performance since 2003 reflects shifting expectations on U.S. monetary policy and relative central-bank divergence, creating tailwinds for many developed currencies. Meanwhile, the Bank of Russia’s decision to cut its daily FX sales removes an important support for the rouble and raises the likelihood of depreciation in 2026. Traders and corporate treasuries should recalibrate hedges and position sizing to reflect lower official support for certain currencies and heightened potential for episodic volatility driven by policy shifts.