Dollar starts 2026 with slight gains after biggest annual drop in eight years

The US dollar started 2026 on Friday with a slight strengthening after last year's difficulties against most currencies, while the yen approached a 10-month low, as traders awaited US economic data to forecast interest rate changes this year, UNN reports with reference to Reuters.

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The narrowing of interest rate differentials between the US and other economies cast a shadow over markets last year, leading to a sharp rise against the dollar for most major currencies, with the exception of the Japanese yen.

Fears about the US budget deficit, a global trade war, and concerns about the independence of the Federal Reserve negatively affected the dollar, and these problems are likely to persist into 2026, the publication writes.

The euro fell 0.2% to $1.1725 on the first trading day of the year after a 13.5% gain last year, while the pound sterling last traded at $1.3455 after a 7.7% gain in 2025. Both showed sharp annual gains since 2017.

Japanese and Chinese markets were closed on Friday, leading to low trading volumes and little activity.

"Market liquidity should improve next week along with a more complete data set," said Jens Nærvig Pedersen, FX strategist at Danske Bank.

The dollar index, which measures the US currency against six other currencies, rose 0.2% to 98.39 on Friday after falling 9.4% in 2025, its biggest drop in eight years.

Economic data, including US employment and unemployment figures, will be released next week, providing insight into the state of the labor market and what the Fed's interest rate might be this year.

At the beginning of the year, the main focus will be on who US President Donald Trump will choose as the next Fed chair, as current head Jerome Powell's term expires in May. Trump has said he will make his choice for Fed chair this month, with White House economic adviser Kevin Hassett currently the favorite on the betting site Polymarket. Investors are preparing for Trump's choice to be more dovish and lower rates, as the president has repeatedly criticized Powell and the Fed for not lowering borrowing costs faster and more significantly.

Traders have already priced in two rate cuts this year, compared to one projected by the currently divided Fed board of directors.

"We expect concerns about central bank independence to persist into 2026, and view the upcoming change in Fed leadership as one of several reasons why the risks to our Fed rate forecast are 'dovish,'" Goldman Sachs strategists said.

The yen was at 156.86 per US dollar after gaining less than 1% against the dollar in 2025. It remained close to its 10-month low of 157.90 reached in November, which attracted the attention of policymakers and increased the likelihood of intervention.

The Bank of Japan raised interest rates twice last year, but this had little impact on the yen's dynamics, as the cautious pace disappointed investors, and speculators unwound significant long positions on the yen opened in April.

Investor concerns are also growing about fiscal expansion under Japanese Prime Minister Sanae Takaichi, although she has tried to somewhat alleviate these fears.

Traders are forecasting the Bank of Japan's next rate hike closer to the end of 2026. Min Joo Kang, senior economist at ING, believes October will be the most likely timing.

"Further fiscal pressure could have a counterproductive effect on the economy, but the current government is expected to maintain its expansionary policies, which poses a significant risk to the economy in 2026," Kang said in an analytical note to clients.

The Australian and New Zealand dollars started the new year from a strong position. The Australian dollar rose 0.5% to $0.6706 after an almost 8% gain in 2025, its best annual performance since 2020.

The New Zealand dollar broke a three-year losing streak, showing a gain of almost 3% last year. On Friday, it strengthened slightly to $0.5772.

Precious metals started the new year with growth after a record 202502.01.26, 12:22 • 1958 views