The U.S. dollar opened 2026 on a weak note, extending pressure seen throughout last year, as investors weighed incoming economic data to assess how global central banks may steer interest rates in the months ahead. Meanwhile, the Japanese yen stabilized near a 10-month low, reflecting ongoing uncertainty around monetary policy.
Last year, a shrinking interest rate gap between the United States and other major economies weighed heavily on the dollar. Most currencies posted strong gains against the greenback, with the yen standing out as a notable exception.
Concerns over the U.S. fiscal deficit, the risk of a renewed global trade war, and questions surrounding the independence of the Federal Reserve all contributed to dollar weakness. These issues are expected to remain in focus throughout 2026.
The euro traded steadily near $1.1752 at the start of the year after surging 13.5% in 2025, while sterling hovered around $1.3473, following a 7.7% annual gain. Both currencies recorded their strongest yearly advances since 2017.
With markets in Japan and China closed for holidays, trading volumes were thin, limiting price action across currency markets.
Dollar Dominance in Question
The U.S. Dollar Index, which tracks the greenback against six major peers, stood near 98.186 after falling 9.4% in 2025, its steepest annual decline in eight years.
Kyle Rodda, senior market analyst at Capital.com, said the dollar may have passed its peak dominance, though he noted that the index has not posted back-to-back annual declines in nearly two decades. He added that the relative strength of the U.S. economy could still support a rebound this year.
Attention now turns to upcoming U.S. economic releases, including payrolls and jobless claims, which may offer insight into labor market conditions and the future path of Fed policy.
A key focus for investors is also the upcoming leadership change at the Federal Reserve. Donald Trump is expected to name a successor to Jerome Powell, whose term ends in May.
Markets are bracing for a potentially more dovish Fed leadership, particularly after Trump’s repeated criticism of the central bank for not cutting rates aggressively enough. Traders are currently pricing in two rate cuts in 2026, compared with just one projected by a divided Fed board.
Strategists at Goldman Sachs said concerns about central bank independence are likely to persist, adding that the Fed leadership transition increases downside risks to their interest rate outlook.
Yen Remains an Outlier
The yen traded near 156.85 per dollar, having gained less than 1% in 2025. It remained close to the 10-month low of 157.90 reached in November, a level that previously prompted warnings from policymakers and raised speculation about possible intervention.
The Bank of Japan raised interest rates twice last year, but the cautious pace disappointed investors and failed to materially strengthen the currency. Speculators also unwound significant long yen positions earlier in the year.
Investor unease has grown around fiscal expansion under Prime Minister Sanae Takaichi, though the government has attempted to ease market concerns.
Markets currently expect the next BOJ rate hike toward the end of 2026. Min Joo Kang, senior economist at ING, said October appears the most likely timing. She warned that further fiscal stimulus could pose risks to the economy if expansionary policies persist.
Antipodean Currencies Gain Ground
The Australian dollar and New Zealand dollar both began the year on firmer footing. The Aussie rose 0.35% to $0.66975, extending gains after climbing nearly 8% in 2025, its strongest annual performance since 2020.
The kiwi also ended a three-year losing streak last year with a nearly 3% gain and edged higher to $0.5761 in early 2026 trading.
