The US dollar started off weak in 2026! Multiple risk factors may worsen the decline.

Notice that after experiencing a slump in most currencies last year, the US dollar had a weak start to 2026 on Friday; meanwhile, as traders await economic data to predict the interest rate directions of various central banks this year, the yen stabilized near a 10-month low. Last year, the narrowing interest rate differentials between the US and other economies cast a shadow over the market, causing most currencies to significantly rise against the US dollar, with the yen being the only exception. Concerns over the US fiscal deficit, global trade wars, and the independence of the Federal Reserve dealt a blow to the US dollar, issues that are likely to persist into 2026. On the first trading day of the year, the euro to US dollar exchange rate stabilized at 1.1752 US dollars, with the currency soaring 13.5% last year; the pound to US dollar closed at 1.3473 US dollars, maintaining stability after a 7.7% increase in 2025. Both the euro and pound achieved their largest annual gains since 2017. With Japanese and Chinese markets closed on Friday, price fluctuations were minimal. Weakening US dollar dominance The US dollar index, which measures the US dollar against six major currencies, stood at 98.186. The index recorded a 9.4% decline in 2025, the largest annual drop in eight years. Kyle Rodda, Senior Market Analyst at Capital.com, stated, "We have seen the peak of US dollar hegemony. Nevertheless, in the past twenty years, the US dollar index has never experienced two consecutive years of decline." "I believe the talk of a collapse of the US dollar is exaggerated, as the relative strength of the US economy means we will see a rebound this year." Economic data, including non-farm payrolls and unemployment figures, will be released next week, providing clues about the health of the labor market and the Federal Reserve's policy rate endpoint this year. The focus at the beginning of this year is mainly on who US President Donald Trump will choose to be the next Federal Reserve Chairman when Jerome Powell's term ends in May. Due to Trump's repeated criticisms of Powell and the Federal Reserve for not cutting rates quickly and significantly enough, investors are preparing for Trump to select a more dovish candidate who will push for rate cuts. Currently, traders expect two rate cuts this year, while the divided Federal Reserve committee predicts only one. Goldman Sachs strategists stated, "We expect concerns about central bank independence to continue into 2026. We believe the forthcoming change in the Federal Reserve leadership is one of several reasons leading us to anticipate a dovish Federal Funds rate forecast." Yen still an exception The yen to US dollar exchange rate stood at 156.85. In 2025, the yen against the US dollar rose less than 1%. Currently, the yen rate hovers around 157.90 (a 10-month low touched in November), a level that has raised concerns among decision-makers and increased the possibility of intervention. The Bank of Japan raised rates twice last year, but this had little effect on improving the yen's performance as its cautious pace disappointed investors, with speculators even unwinding a large amount of yen long positions held in April. Furthermore, investors are increasingly concerned about fiscal expansion under Prime Minister Sanae Takichi's leadership, although she has tried to alleviate some of those concerns. Traders expect the Bank of Japan's next rate hike to be at the end of 2026. ING Senior Economist Min Joo Kang predicts that the most likely timing will be in October. Kang wrote in a client report, "Further fiscal stimulus may have adverse effects on the economy, but it is expected that the current government will maintain its expansionary policy stance, posing significant risks to the economy in 2026." The Australian dollar and New Zealand dollar had a good start to the new year. The Australian dollar rose 0.35% on Friday, at 0.66975 US dollars, following an almost 8% increase in 2025 (its strongest annual performance since 2020). The New Zealand dollar rose nearly 3% last year, ending a three-year downward trend. On Friday, the New Zealand dollar rose slightly to 0.5761 US dollars.