U.S. Dollar Starts 2026 Weak as Yen, Euro and Sterling Hold Firm Amid Rate Cut Expectations

The U.S. dollar began 2026 on a soft note, extending the weakness it showed throughout much of 2025, as currency markets continue to adjust to narrowing interest rate differentials between the United States and other major economies. Investors remain cautious ahead of key economic data and central bank developments that could shape the outlook for global interest rates this year.

After posting its sharpest annual decline in eight years in 2025, the dollar index hovered near 98.24 in early Asian trading. Last year’s drop was driven by U.S. interest rate cuts, uncertainty surrounding trade policy, and growing concerns about the Federal Reserve’s independence. As these factors persist into 2026, pressure on the greenback remains evident.

The euro held steady around $1.1752 after surging 13.5% in 2025, its strongest yearly gain since 2017. Sterling also remained firm near $1.3474, following a 7.7% rise last year. Both currencies benefited from improving sentiment outside the United States and the fading pace of rate cuts by other central banks, which reduced the dollar’s yield advantage.

The Japanese yen stabilized near 156.74 per dollar, close to a 10-month low that previously triggered intervention concerns from Japanese authorities. Although verbal warnings from Tokyo helped ease fears late last year, traders remain alert, especially as upcoming economic data could influence the Bank of Japan’s policy direction. With markets in Japan and China closed, trading volumes in Asia were subdued.

Looking ahead, investors are closely watching U.S. labour market data, including payrolls and jobless claims, for signals on where interest rates may head in 2026. Attention is also focused on who President Donald Trump will nominate as the next Federal Reserve Chair when Jerome Powell’s term ends in May. Markets expect a more dovish stance, with traders currently pricing in two U.S. rate cuts this year.

Meanwhile, commodity-linked currencies showed resilience. The Australian dollar edged higher near $0.6680 after its strongest annual performance since 2020, while the New Zealand dollar held steady around $0.5755, snapping a three-year losing streak in 2025.