Dollar starts 2026 softly after worst plunge in 8 years
The US dollar began 2026 on a weak note on Friday, having faced challenges against most currencies throughout the previous year. Meanwhile, the yen stabilized close to 10-month lows as traders anticipated economic data this month to assess the trajectory of interest rates. A diminishing interest rate disparity between the US and other economies has influenced the currency market, leading to significant gains for most currencies against the dollar in 2025, with the yen being a notable exception. The euro held firm at $1.1752 during early Asian trading after a remarkable 13.5 per cent rise last year, while sterling was last seen at $1.3474, reflecting a 7.7 per cent gain in 2025. Both currencies recorded their most significant annual increases since 2017.
The yen was last recorded at 156.74 per US dollar, having risen by less than 1 percent against the greenback in 2025. It remains near the 10-month low of 157.90, reached in November, which raised concerns about potential intervention from Tokyo. Severe verbal warnings from authorities in Tokyo through December succeeded in pushing the yen away from the intervention zone; however, those fears continue to linger. As markets in Japan and China remain closed, trading volumes are expected to be low, resulting in subdued movements during the Asian trading hours.
Anthony Doyle stated that the global economy approaches 2026 with reasonable momentum, while the likelihood of recession remains low. Beyond the borders of the United States, the momentum for central bank rate cuts is diminishing, which is a characteristic rather than a flaw: a decrease in rate surprises lessens one-sided market movements and enhances the significance of selection among regions, factors, and asset classes. The dollar index, which measures the US currency against six other units, stood at 98.243 following a 9.4 percent decline in 2025, marking its largest drop in eight years. This decline was influenced by interest rate cuts, erratic trade policies, and concerns regarding the Federal Reserve’s independence during the Trump administration.
Next week, economic data such as the US payrolls report and jobless figures are set to be released, offering insights into the state of the labor market and the potential trajectory of US interest rates for the year. In the early part of the year, significant attention will be directed towards the decision of US President Donald Trump regarding the appointment of the next Fed Chair, as the term of current head Jerome Powell concludes in May. Investors are preparing for Trump’s selection to adopt a more dovish stance and reduce rates following Trump’s persistent criticism of the Fed and Powell last year for their failure to implement rate cuts more quickly or aggressively. Traders are anticipating two rate cuts this year, in contrast to the single cut forecasted by a divided Federal Reserve. “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,” strategists said. The Australian and New Zealand dollars both commenced the new year with a strong performance. The Aussie was 0.1 per cent higher at $0.66805 following a nearly 8 per cent rise in 2025, marking its strongest yearly performance since 2020. The kiwi ended its three-year losing streak, achieving a nearly 3 per cent gain last year. On Friday, it remained relatively stable at $0.5755.
