2025 in Review: Currency Markets

How Interest Rates, Employment Data, and Global Shifts Shaped FX — and What 2026 Holds
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As 2025 comes to a close, global currency markets delivered a year defined by shifting central bank policy, geopolitical risk, and evolving macroeconomic sentiment — creating both challenges and opportunities for businesses, investors, and FX risk managers alike.

Interest-rate decisions, labour market data, and global growth concerns consistently moved markets, reinforcing one key lesson: currency exposure is no longer a background consideration — it’s a strategic one.

US Dollar: From Strength to Softening

The US dollar — long considered a global safe haven — began 2025 with strength but experienced broad softening through the year. The Dollar Index (DXY) declined approximately 4–5% year-to-date, marking its weakest annual performance since 2020 as narrowing interest-rate differentials and policy uncertainty weighed on sentiment.

Key drivers included:

• The Federal Reserve’s rate cuts, which reduced the USD’s yield advantage relative to other major economies
• Political and fiscal uncertainty in the U.S., including trade policy shifts and election-related risks
• Portfolio rebalancing away from USD assets toward commodities and higher-risk currencies

For corporate treasurers and payment managers, this environment underscored the importance of dynamic FX hedging — particularly for organizations with USD payables or receivables — rather than relying solely on directional market calls.

Canadian Dollar (CAD): Commodity-Linked, Range-Bound

2025 was a story of two halves for the Canadian dollar.

Early in the year, the loonie faced pressure as both the Bank of Canada and the Federal Reserve cut rates, compressing yield spreads and weakening CAD against the USD. As highlighted in recent market coverage, benchmark Canadian bond yields slipped, and concerns around Canada’s FX-linked debt added further pressure on the currency.

Later in the year, however, support emerged:

• Commodities — particularly oil — helped stabilize the CAD, allowing it to recover toward five-month highs despite soft domestic factory sales
• The currency traded in a broad range, reflecting sensitivity to yield differentials, BoC policy expectations, and global risk appetite

This range-bound behavior reinforced the value of active FX management, especially for Canadian businesses exposed to USD costs or revenues.

Employment Data: Strength With Important Caveats

Labour market data played a critical role in shaping FX expectations — particularly in Canada.

Statistics Canada reported that unemployment eased to 6.5%, with over 54,000 jobs added in November. While the headline numbers suggested strength, it is worth highlighting the nuance beneath the surface:

• A significant portion of gains came from part-time employment
• Job-security sentiment remained softer than in previous years
• Sector-specific growth remained uneven

Employment trends matter because they directly influence interest-rate expectations and currency valuations. While stronger jobs data can support the Canadian dollar, uneven growth and softer confidence kept uncertainty firmly in place.

With both Canada and the U.S. approaching key rate decisions shortly after this data release, FX markets — and businesses — remained highly sensitive to incoming economic signals.

Interest Rates: The Core FX Driver of 2025

Interest-rate policy remained the dominant force behind currency movements throughout the year.

In December:

• The Federal Reserve cut rates by 0.25%, setting the policy range at 3.75%, as job creation slowed and unemployment edged higher, even with inflation still above target
• The Bank of Canada held its policy rate at 2.25%, balancing easing headline inflation against uneven domestic demand and mixed global growth conditions

Rapid shifts in interest-rate expectations feed FX volatility. For businesses managing multi-currency cash flows, this made proactive planning — rather than reactive execution — increasingly critical.

Other Major Currencies: Divergent Themes

• Euro (EUR): Steady ECB rate reductions and softer growth capped EUR strength in 2025, though forecasts point to modest recovery potential in 2026
• British Pound (GBP): Supported by relative yield levels and portfolio flows, GBP remained resilient, with projections above 1.35 versus USD into early 2026
• Emerging & Commodity FX: AUD, NZD, and EM currencies experienced volatility tied to commodity cycles, China growth signals, and global risk sentiment

This environment reinforced the importance of diversified FX strategies rather than reliance on single-currency views — particularly for multinational organizations.

Looking Ahead: Currency Forecasts for 2026

While forecasts always carry uncertainty, current models suggest the following broad themes into 2026:

US Dollar

• Likely sideways to slightly weaker versus major currencies as rate differentials continue to narrow; EUR/USD and GBP/USD may trend higher if rate expectations diverge modestly.
• USD/CAD forecasts imply modest CAD strengthening

Euro & Pound

• EUR could regain ground with stable growth and cycles of ECB policy adjustments.
• GBP is projected to remain resilient versus USD and EUR, reflecting relative macro strength and yield dynamics.

Commodity & Emerging Currencies

• AUD and NZD performance will likely hinge on commodity cycles and China growth signals.
• EM FX may experience higher beta movement — offering both opportunity and risk

Final Thoughts: Planning Ahead in an Uncertain FX Environment

2025 reminded us that currency markets are multi-dimensional — shaped by central bank strategy, geopolitics, trade policy, technological evolution, and capital flows. For businesses, the lesson is clear: currency exposure isn’t a side effect — it’s a strategic consideration.

As we enter 2026, demand for smarter, adaptable FX solutions incorporating real-time insights, risk mitigation tools, and tailored execution will only grow. Whether you’re managing payables in CAD, receivables in EUR, or hedging USD exposures, a strategy that balances macro foresight with tactical execution will be essential.

Volatility isn’t going away — but unmanaged FX risk doesn’t have to be part of your strategy. As we move into 2026, PulseFX is here to help businesses navigate currency markets with smarter execution, proactive risk management, and human-led expertise.

Start 2026 informed, protected, and positioned for growth with PulseFX.

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