The US dollar opened the new year 2026 on a firmer footing this Friday, marking a shift from its broadly weaker performance last year. Financial markets are now bracing for a packed schedule of US economic indicators next week, headlined by multiple reports on the labor market, which will be critical in shaping expectations for the Federal Reserve's interest rate path.
Data and Leadership Decisions to Guide Dollar's Path
After a challenging 2025 where it lost ground to most major currencies except the Japanese yen, the greenback found some support. The dollar index, which tracks the currency against a basket of peers, edged up by 0.12% to 98.37. This cautious strength comes ahead of a wave of data, culminating in the pivotal non-farm payrolls report next Friday.
Analysts point out that a narrowing gap between US interest rates and those in other economies drove the dollar's decline last year. Persistent concerns about the US fiscal deficit, global trade tensions, and fears over Federal Reserve independence further pressured the currency, and these issues are expected to remain relevant throughout 2026.
"Market participants could remain cautious ahead of a dense calendar of U.S. macroeconomic releases next week that could shape expectations for both the dollar and interest rates into 2026," noted Joseph Dahrieh, Managing Principal at Tickmill.
Adding another layer of uncertainty is the upcoming leadership change at the US central bank. President Donald Trump has indicated he will announce his choice for the next Fed chair this month, as the term of current Chair Jerome Powell concludes in May. Given Trump's repeated criticism of Powell for not cutting rates more aggressively, markets anticipate his nominee will favor a more dovish policy. Traders are currently pricing in two full rate cuts for 2026, compared to the single cut projected by a divided Fed board.
Goldman Sachs strategists echoed this sentiment, stating, "We expect that concerns around central bank independence will extend into 2026, and see the upcoming change in Fed leadership as one of several reasons why risks around our Fed funds rate forecast skew dovish."
Euro, Sterling Ease; Yen Stays Under Pressure
The euro dipped 0.11% to $1.1732 following a report showing Eurozone manufacturing activity contracted to a nine-month low in December. Despite the recent softness, the euro had a stellar 2025, surging over 13% in its best annual performance since 2017.
Similarly, the British pound softened slightly to $1.3465. It had also recorded a significant yearly gain of 7.7% in 2025, its largest since 2017. Trading volumes were thin on the day due to market holidays in Japan and China.
Yen Remains the Notable Exception
Contrary to other major currencies, the Japanese yen continued to struggle against the dollar, weakening to 156.84 per dollar. It had gained less than 1% in all of 2025 and remains perilously close to a 10-month low of 157.89 touched in November, a level that had prompted official concern and intervention warnings from the Bank of Japan (BOJ).
The yen's persistent weakness has persisted despite the BOJ hiking interest rates twice last year. Investors have been disappointed by the pace of tightening and are looking for more aggressive action. Market data suggests traders do not see a greater than 50% chance of another BOJ rate hike before July, keeping the currency vulnerable.
As 2026 unfolds, the trajectory of the US dollar will be heavily influenced by the twin forces of domestic economic data and the significant impending change in leadership at the world's most influential central bank.
