Yen Anchored by Policy
As December 2025 unfolded, the Japanese yen (JPY) continued to attract close attention from market participants, trading in an environment characterised by subdued liquidity and heightened caution typical of the year end period. Price action was influenced less by short-term speculative activity and more by underlying structural factors, most notably persistent policy divergence, entrenched deflationary tendencies and broader shifts in global risk sentiment.
The primary driver of yen dynamics remained the Bank of Japan’s unwavering commitment to accommodative monetary policy. While several major central banks began to reassess the scale and duration of policy easing in anticipation of 2026, the BoJ held firmly to its ultra-loose framework, underscoring the need to sustain domestic growth and secure a durable, wage-driven inflation cycle. This stance continued to anchor Japanese yields at low levels, reinforcing the yen’s role as a funding currency and maintaining interest in carry-trade strategies, albeit with reduced participation as the year drew to a close.
Global macroeconomic developments further shaped sentiment towards the yen. Ongoing geopolitical tensions and regional conflicts dampened risk-appetite behaviour, generating short-lived support for the currency. However, these periods of yen strength were largely offset as stable global financial conditions tempered a sustained demand for traditional safe-haven assets. As a result, the yen’s defensive characteristics appeared increasingly conditional, with capital flows remaining uneven rather than persistently risk-averse.
Throughout December, Japanese policymakers maintained a visible presence in currency markets. Occasional official remarks served to highlight sensitivity to excessive or disorderly movements, helping to constrain volatility within narrow ranges. Nevertheless, with year-end liquidity thinning and speculative positioning diminished, market responses to such commentary were muted, reflecting seasonal conditions rather than any material shift in the underlying policy or economic landscape.
Looking ahead, market participants remain focused on the Bank of Japan’s interest rate decision scheduled for 23 January, which is expected to play a key role in shaping yen dynamics and positioning as markets move through the first quarter of 2026.
Gold Steals the Crown
Throughout 2025 and increasingly as the year drew to a close, XAU/USD was shaped by a complex global backdrop defined by geopolitical tension, shifting U.S. dollar dynamics and evolving monetary policy expectations. Gold’s relationship with the dollar underscored its enduring role not only as a defensive asset, but also as a barometer of broader macroeconomic conditions, with price action influenced by forces extending well beyond traditional supply and demand considerations.
As the U.S. dollar came under pressure from a confluence of political, fiscal and confidence-related factors, gold emerged as one of the defining market narratives of the year. Twelve months earlier, XAU/USD had opened near US$2,623 per ounce. By year end, the metal had risen by more than 64 percent, closing around US$4,530 per ounce. This substantial repricing reflected a year in which gold increasingly captured investor attention amid heightened global uncertainty.
Geopolitical developments were a persistent influence throughout the year. Prolonged conflicts and elevated strategic uncertainty across regions such as Eastern Europe and the Middle East sustained continued flows toward global financial markets. These conditions reinforced gold’s appeal as a store of value during periods of instability, with episodes of intensified geopolitical stress often coinciding with increased market participation. Over time, however, investor responses became more measured, as markets adjusted to a prolonged environment of geopolitical risk and adopted a more selective approach to defensive allocation.
The U.S. dollar remained a critical variable in shaping XAU/USD dynamics. Periods of relative dollar weakness, driven by shifts in risk appetite, fiscal considerations and reassessments of U.S. economic momentum, played a meaningful role in gold’s valuation over the course of the year. While the dollar retained its status as the world’s primary reserve currency, its movements increasingly reflected broader liquidity conditions and confidence levels rather than domestic fundamentals alone, influencing gold’s performance against it.
Monetary policy developments added further depth to the gold-dollar relationship. Throughout 2025, markets closely monitored the Federal Reserve’s response to evolving inflation and interest rate adjustments. The Fed’s cautious approach, prioritising price stability and financial resilience, contributed to sustained debate around real interest rates and the opportunity cost of holding non-yielding assets. This environment shaped the interaction between gold and the dollar without producing uniform or linear outcomes.
By December, XAU/USD had entered a more subdued year-end phase, influenced by reduced liquidity and portfolio rebalancing. Nevertheless, the extraordinary trends that defined the year remained firmly in focus. Central bank reserve management, fiscal developments and global liquidity trends continued to guide longer-term positioning, reinforcing gold’s position as a strategic component in uncertain times and underlining a remarkable year in the gold market’s measured ascent.
USD Tested in 2025
The United States dollar (USD) recorded one of its weakest annual performances in recent years, weighed down by a combination of political uncertainty, evolving trade dynamics and deeper structural challenges within the global financial system. The currency’s decline was not driven by a single disruptive event, but rather unfolded gradually, reflecting a sustained reassessment of confidence rather than acute market stress.
Political developments in the United States played a meaningful role in shaping sentiment. The renewed visibility of Donald Trump and the resurgence of protectionist themes reintroduced a degree of unpredictability into policy expectations. Market unease grew around the potential implications of tariff expansion, economic nationalism and a more confrontational stance on global trade. These factors raised concerns about supply-chain stability and international relations, particularly among key trading partners and contributed to a more cautious stance towards the dollar among global investors.
Uncertainty surrounding trade policy proved especially influential. Renewed debate over tariffs and cross-border restrictions complicated the outlook for global growth and challenged perceptions of the United States as a predictable economic leader. As trade tensions resurfaced, currency markets became increasingly reactive to political signals, with the dollar trading more as a proxy for policy risk than as a reflection of economic strength.
Fiscal considerations further intensified pressure on the currency. Prolonged discussions around government funding, rising public debt and long-term fiscal sustainability remained persistent themes throughout the year. Elevated levels of Treasury issuance and periodic budgetary impasses reinforced concerns around supply pressures and fiscal discipline. While these issues rarely dictated short-term market moves, they contributed to a broader narrative that dampened demand for dollar-denominated assets.
At the same time, shifts in global reserve management and capital allocation continued to influence the dollar’s standing. Ongoing dialogue around diversification away from traditional reserve currencies, alongside experimentation with alternative settlement frameworks, gradually altered global capital flows. Although the dollar retained its dominant role within the international monetary system, these trends highlighted an increasingly competitive and multipolar currency environment.
By year end, the USD reflected a market recalibrating its assessment of U.S. political stability, fiscal credibility and global leadership. The experience of 2025 illustrated how governance, trade policy and structural confidence can exert sustained pressure even on the world’s most established reserve currency.