FOREX-Dollar steady ahead of Fed minutes in sluggish end to dismal 2025

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Fed minutes expected to show divided central bank 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.

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 $1.177225, on course for a yearly gain of 13.7%, while the pound fetched $1.3509 and was set for ?an increase of 8% in 2025.

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 98.033 in early trading, not ?far from a three-month low.

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 dollar 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.

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.

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.

(Reporting by Ankur Banerjee; Editing by Thomas Derpinghaus)