The U.S. dollar began 2026 on firmer footing on Friday after a difficult year against most major currencies, as investors turned their focus to a busy week of U.S. economic data that could clarify the future direction of interest rates.
Expectations of a narrowing interest rate gap between the United States and other economies helped drive strong gains in several currencies against the dollar, with the notable exception of the Japanese yen. At the same time, lingering concerns over the U.S. fiscal deficit, the risk of a global trade war, and questions around Federal Reserve independence continued to weigh on sentiment toward the greenback and are expected to remain relevant throughout 2026.
Attention is now shifting to next week’s U.S. data releases, particularly labor market reports that will culminate in Friday’s government payrolls figures. These numbers are likely to play a key role in shaping expectations for the Federal Reserve’s policy path.
“Market participants may stay cautious ahead of a heavy schedule of U.S. macroeconomic data next week, which could influence expectations for both the dollar and interest rates into 2026,” said Joseph Dahrieh, managing principal at Tickmill.
The dollar index, which tracks the U.S. currency against a basket of peers, edged up 0.12% to 98.37. The euro slipped 0.11% to $1.1732 after data showed euro zone manufacturing activity fell in December to its weakest level in nine months. Despite the pullback, the euro rose more than 13% in 2025, marking its strongest annual performance since 2017.
Sterling eased 0.04% to $1.3465, following a 7.7% rise last year that also represented its biggest yearly gain since 2017. Trading volumes were thin on Friday as markets in Japan and China remained closed.
Investors are also closely watching who Donald Trump will nominate as the next Federal Reserve chair, with Jerome Powell’s term set to end in May. Trump has indicated he plans to announce his pick this month, and markets widely expect the nominee to favor more aggressive interest rate cuts. The president has repeatedly criticized the Fed for not lowering borrowing costs faster and by a larger margin.
Traders are currently pricing in two interest rate cuts this year, compared with just one projected by a divided Fed board. Strategists at Goldman Sachs said concerns over central bank independence are likely to persist into 2026, adding that the upcoming change in Fed leadership increases the downside risks to their federal funds rate outlook.
Yen remains the exception
The Japanese yen weakened 0.11% to 156.84 per dollar after gaining less than 1% against the greenback in 2025. The currency remains near a 10-month low of 157.89 reached in November, a level that previously drew attention from policymakers and raised speculation about possible intervention by the Bank of Japan.
Although the Bank of Japan raised interest rates twice last year, the moves provided limited support for the yen, as investors appeared to be looking for a more aggressive tightening cycle. According to LSEG data, markets are not pricing in more than a 50% chance of another BOJ rate hike until July.
