The US dollar started 2026 strong on Friday, ending last year’s decline against most currencies, as investors prepare for a crucial week of economic data that could influence Federal Reserve policy and global markets.
The rebound comes after the steepest annual decline since 2017, of more than 9%, driven by narrowing interest rate gaps with other economies and lingering concerns about U.S. fiscal health, a global trade war and Fed independence, risks that remain present this year.
Next week’s avalanche of data, culminating in next Friday’s U.S. payrolls report, is expected to offer clues as to whether the Federal Reserve will cut interest rates again, with markets already pricing in two cuts versus the single one projected by a divided central bank.
“It will be a time for a lot of evaluation; we won’t have the Fed meeting until the end of the month, and there is no consensus,” said Juan Pérez, director of trading at Monex USA in Washington.
“This recent shutdown of the US government was unprecedented and inconceivably long, so it really affected how the data has been taken, how it has been interpreted, and how it has been able to be evaluated or considered completely accurate.”
Markets in Japan and China were closed on Friday, leading to reduced trading volume.
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The dollar index, which measures the greenback against a basket of currencies, rose 0.24% to 98.48, while the euro fell 0.25% to $1.1716.
Euro zone manufacturing activity fell in December to its lowest level in nine months, according to a survey. The European currency had risen more than 13% last year, its biggest annual increase since 2017.
The pound weakened 0.18% to $1.3445 following a 7.7% rise in 2025, also its biggest annual rise since 2017.
Investors will be watching US President Donald Trump’s choice of the next Federal Reserve chair as current chief Jerome Powell’s term ends in May. Trump said he will make his choice this month, and many market participants expect his appointment to support additional rate cuts, given that the president has repeatedly criticized Powell and the Fed for not reducing borrowing costs more quickly and broadly.
Traders are already fully pricing in two cuts this year versus one projected by the Fed’s currently divided board.
“We expect concerns about central bank independence to extend into 2026, and view the upcoming change in Fed leadership as one of several reasons why risks to our federal funds rate forecast are tilted to the downside,” Goldman strategists said in a note to clients.
The yen remains the exception
The Japanese yen weakened 0.16% against the dollar, settling at 156.91 per greenback, having risen less than 1% against the dollar in 2025. It remained near a 10-month low of 157.89 reached in November, drawing the attention of monetary policymakers and raising expectations of possible intervention by the Bank of Japan.
The BOJ raised interest rates twice last year, but this had little effect on the yen’s performance as investors appeared to expect a more aggressive pace of hikes.
Markets are pricing in no more than a 50% chance that the Bank of Japan will make another rate hike before July, according to LSEG data.
In cryptocurrencies, bitcoin rose 1.64%, trading at $89,741.61.
With information from Reuters
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