The US dollar started 2026 on a weak note after last year’s biggest drop in eight years. In contrast, other currencies showed strength, with the exception of the yen, which remained fragile at a near 10-month low.
Investors are now awaiting key economic data this month to gauge the direction of interest rates.
At 9.50am, the US Dollar Index (DXY) was at 98.175 points, down 0.11% since it opened early Friday in Asian trading.
The interest rate gap between the US and other economies has narrowed, undermining the dollar’s appeal in currency markets.
As a result, most major currencies have surged against the dollar throughout 2025, with the euro and pound sterling recording their biggest annual gains since 2017, at 13.5% and 7.7% respectively. The yen rose just under 1% and remained close to its lowest level since November, raising concerns about possible intervention by the Bank of Japan.
Strong warnings from Tokyo authorities throughout December have prevented the yen from falling further, but the ‘fear’ still haunts the market. With markets in Japan and China closed, trading volumes are expected to be thin, making currency movements less noticeable during Asian hours.
According to Anthony Doyle, chief investment strategist at Pinnacle Investment Management, the global economy enters 2026 with moderate momentum and the risk of recession remains low. He added that the impulse to cut interest rates outside the US is fading, which is reducing market shocks and forcing investors to be more selective in asset selection by region and sector.
The biggest drop in eight years has been driven by interest rate cuts, uncertain trade policy, and doubts about the independence of the Federal Reserve during the Trump administration.
Key data such as the US jobs report and unemployment rate are due next week, which will provide a true picture of the health of the labor market and the likely direction of interest rates this year.
The focus is also on who President Trump will choose to replace Jerome Powell as Fed chairman in May.
The market expects Trump's nominee to be more pro-rate-cutting, especially after Trump repeatedly criticized the Fed and Powell for being slow to cut rates last year. The market is now pricing in two rate cuts, compared to the one expected by the divided Fed.
Goldman Sachs strategists say concerns about central bank independence will persist through 2026, and a change in Fed leadership is a key risk factor for a more dovish stance.
The crisis of confidence in the Fed is nothing new, but it is becoming more pronounced as politics begins to interfere with monetary policy. This not only invites market uncertainty, but also tests the resilience of the dollar, which has long been considered a safe haven. Investors should brace themselves for a new wave of more challenging volatility.
