Dollar Rebounds in Early 2026, Markets Await Fed Data
The US dollar opened 2026 trading on a stronger note on Friday, breaking last year's weakening trend against most major currencies. This strengthening comes as market participants prepare for a series of important economic data releases next week that could influence the direction of Federal Reserve policy and global market sentiment.
Throughout 2025, the dollar recorded its deepest annual decline in eight years—weakening more than 9%—as the US interest rate spread narrowed. Concerns about the US fiscal situation, the risk of a trade war, and the issue of the Fed's independence also continued to weigh, and these factors are considered to remain concerns in 2026.
The market focus is now on a deluge of economic data culminating in next Friday's payrolls report. This data will provide clues as to whether the Fed still has room for further interest rate cuts. The market is even starting to price in two cuts, more aggressive than the Fed's internal projections of just one. On the other hand, the closure of Japanese and Chinese markets on Friday meant trading volumes were relatively thin.
The dollar index, which tracks the greenback's strength against a basket of currencies, rose 0.1% to 98.08. The euro weakened 0.15% to $1.1720, despite surging more than 13% throughout 2025—its best since 2017—amid December eurozone manufacturing data that fell to its weakest level in nine months. The pound sterling also fell 0.14% to $1.3454 after posting a 7.7% gain last year.
Investors are also monitoring political-monetary factors: who President Donald Trump will choose to lead the Fed next, as Jerome Powell's term ends in May. Trump has stated that he will announce his choice for Fed chairman this month, and the market believes his chosen candidate is potentially more inclined to cut interest rates, given Trump's frequent criticism of Powell's interest rate policy.
The Yen Becomes an "Outlier"
The Japanese yen is again an exception. The yen weakened 0.12% to 156.86 per dollar, after strengthening less than 1% throughout 2025 and remaining near its 10-month low of 157.89. Although the Bank of Japan raised interest rates twice last year, the yen hasn't benefited much, as the market views the BOJ's actions as insufficiently aggressive. LSEG data shows the probability of the next BOJ rate hike before July remains below 50%.
Source: Newsmaker.id
