Introduction to the US Dollar’s Performance

The US dollar started 2026 on a positive note after facing challenges against most currencies in the previous year. This change comes as traders await significant US economic data, including reports on the labor market, which will help determine the path of interest rates.

Factors Affecting the US Dollar

A key factor contributing to the dollar’s struggles has been the narrowing interest rate difference between the US and other economies. This has led to substantial gains for most major currencies against the dollar, except for the Japanese yen. Concerns about the US fiscal deficit, a global trade war, and the independence of the Federal Reserve have also taken a toll on the dollar. These issues are expected to persist into 2026.

Upcoming Economic Data

Next week will see the release of several important economic reports, culminating in the government payrolls report on Friday. This data will provide valuable insights into the potential movement of the Federal Reserve’s policy rate. According to Joseph Dahrieh, Managing Principal at Tickmill, "Market participants could remain cautious ahead of a dense calendar of US macroeconomic releases next week that could shape expectations for both the dollar and interest rates into 2026."

Currency Movements

The dollar index, which measures the dollar against a basket of currencies, rose by 0.12 percent to 98.37. The euro fell by 0.11 percent to USD1.1732, following a significant 13 percent increase last year, its largest annual rise since 2017. Sterling weakened by 0.04 percent to USD1.3465, after a 7.7 percent increase in 2025, also its biggest yearly jump since 2017.

Market Expectations

Investors are eagerly awaiting the announcement of the next Federal Reserve chair, as the term of current head Jerome Powell ends in May. US President Donald Trump has indicated that he will make his selection this month, and many expect his choice to be in favor of further rate cuts. Traders are currently pricing in two rate cuts this year, compared to the one projected by the Fed.

Central Bank Independence and Rate Cuts

Concerns about central bank independence are expected to continue into 2026, with the upcoming change in Fed leadership being a key factor. Goldman strategists note, "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."

Japanese Yen Performance

The Japanese yen weakened by 0.11 percent against the dollar to 156.84 per dollar, after rising less than 1 percent against the dollar in 2025. It remains close to a 10-month low, which has raised expectations for a possible intervention by the Bank of Japan (BOJ). The BOJ hiked interest rates twice last year but failed to significantly support the yen’s performance.

Conclusion

In conclusion, the US dollar’s performance in 2026 will be closely watched, particularly with the release of significant economic data and the selection of the next Federal Reserve chair. The dollar’s struggles against most currencies, concerns about central bank independence, and expectations for rate cuts will all play a role in shaping its path. As traders and investors navigate these factors, the dollar’s value is likely to remain volatile, influenced by both domestic and global economic trends.