Dollar Plunge Fuels Euro Rally, Rouble Faces Risks

Introduction

The foreign-exchange landscape is being reshaped by two concrete policy moves. First, the US dollar posted its largest annual decline since 2017, pressured by renewed expectations of Federal Reserve rate cuts and shifting investor positioning. Second, Russia’s central bank announced a sizable reduction in daily FX sales, trimming a key source of state support for the rouble. Together these developments are changing near-term risk-reward calculations across major and emerging currency pairs.

Dollar’s Big Decline: Drivers and Immediate Effects

What pushed the dollar down

The dollar’s year-to-date slump—roughly a single-digit percentage drop against a basket of peers—has been driven primarily by changing expectations around US monetary policy. Financial markets now price a higher probability of Fed rate cuts in 2026, with analysts forecasting two to three quarter-point reductions. Expectations of lower US yields relative to other economies reduce the dollar’s carry and appeal, prompting profit-taking and reallocation into currencies like the euro and pound.

Pair-level impacts and capital flows

The euro has been the standout beneficiary, appreciating strongly and moving above the $1.17 area. The pound has also gained with sterling targets nudged higher by strategists. These moves reflect both interest-rate differentials and the market’s rotation into currency positions that stand to benefit from relative strength outside the US.

Two practical consequences traders are already seeing:

• Long-euro and long-sterling positions have become crowded, increasing the chance of short-term retracements on risk-off headlines.
• Flows into higher-yielding or structurally tighter currencies may accelerate if the Fed signals a clearer easing path, amplifying momentum across G10 crosses.

Russia Cuts FX Sales: What It Means for the Rouble

The policy change

From mid-January the Russian central bank will reduce its own daily foreign-exchange sales from roughly 8.94 billion roubles to 4.62 billion roubles, lowering total state FX sales (including National Wealth Fund operations) by about 30% to roughly 10.22 billion roubles. This is a concrete reduction in direct market support and signals a shift toward relying more on domestic borrowing or other fiscal measures.

Immediate market reaction and medium-term risk

Initial market reaction was muted: the rouble showed only modest movement, trading in the high-70s per US dollar in the immediate aftermath. However, the policy change matters because it removes a predictable buffer that had helped dampen volatility during revenue shocks, especially in a commodity-exposed economy.

Key implications for the rouble include:

• Higher vulnerability to oil-price swings and export receipts—reduced FX sales mean less smoothing of external shocks.
• Potential for increased volatility—without consistent state interventions, speculative flows can move the currency more rapidly.
• Policy trade-offs—authorities may opt for domestic financing solutions, which can weigh on local liquidity and yields.

Putting Both Stories Together: Cross-Asset Considerations

The combination of a softer dollar and reduced Russian FX intervention creates differentiated opportunities and risks. A weaker dollar generally supports commodity-linked and eurozone trade dynamics, but the rouble’s newfound exposure suggests that not all commodity currencies will benefit equally—especially where state support was previously a stabilizing force.

For traders and portfolio managers, practical steps include re-evaluating position sizing in euro and sterling pairs (given momentum and potential crowding), and monitoring emerging-market FX that may be sensitive to both commodity moves and reductions in local backstops.

Watchlist: near-term indicators

• Federal Reserve communications and US economic data that could confirm or temper rate-cut expectations.
• Eurozone growth and inflation readings that validate the euro’s advance.
• Oil and gas revenue signals for Russia, and any follow-up fiscal measures that could offset reduced FX sales.
• Liquidity and volatility metrics in the rouble on days of larger-than-normal flows.

Conclusion

Recent confirmed policy moves—a marked decline in the dollar driven by rising Fed-easing expectations, and an intentional scaling back of Russian FX sales—are reshaping trade dynamics. The euro and sterling have benefited from dollar weakness, while the rouble faces higher depreciation and volatility risk as state support is pared back. Market participants should prioritize rate-driven newsflow, commodity receipts for Russia, and liquidity indicators when adjusting FX exposures in the coming weeks.