Dollar begins 2026 gently following its biggest decline in eight years.

SINGAPORE – Currency Update

The dollar began 2026 on a weak note after facing difficulties against many currencies last year. The yen showed some stabilization close to a 10-month low as traders awaited economic data this month, which will help determine the direction of interest rates.

The narrowing interest rate gap between the U.S. and other nations is affecting forex markets, leading most currencies—except the yen—to appreciate significantly against the dollar in 2025.

In early Asian trading, the euro remained stable at $1.1752, having risen 13.5% last year. Meanwhile, the pound was last priced at $1.3474, gaining 7.7% in 2025. Both these currencies marked their largest annual gains since 2017.

The yen, however, only increased less than 1% against the dollar last year, trading at 156.74 yen per dollar after recently treading near a 10-month low of 157.90 yen hit in November, which has raised concerns about potential Japanese government intervention.

During December, officials in Tokyo issued stern warnings and managed to keep the yen out of intervention territory, but concerns linger.

With Japan and China markets closed, trading volumes are likely to remain low during Asian hours.

According to Anthony Doyle, chief investment strategist at Pinnacle Investment Management, the global economy enters 2026 with a decent momentum, suggesting a low chance of recession.

“The drive to cut rates among central banks is easing outside the U.S., but I think this shift is more of a feature than a bug. With fewer rate surprises, there’s a reduced chance of sudden market moves and a heightened need to choose carefully across different regions, factors, and asset classes,” he noted.

The dollar index, which compares the U.S. currency to six other currencies, fell by 9.4% last year, landing at 98.243. This represented the largest drop in eight years, influenced by lower interest rates, uncertain trade policies, and worries about the Fed’s independence during the last Trump administration.

Upcoming economic indicators, including U.S. jobs and unemployment data next week, are expected to provide insights into labor market health and potential interest rate trends this year.

Attention will also be on whom U.S. President Trump selects as the next Federal Reserve chair, as current Chairman Jerome Powell’s term is set to expire in May.

Investors seem to be preparing for a more dovish approach to rate cuts after President Trump voiced repeated criticism of the Fed and Chairman Powell last year for not enacting quicker rate reductions. Traders are anticipating two cuts this year, amid expectations of a divided Federal Reserve.

Goldman strategists mentioned, “We foresee continued concerns about central bank independence extending into 2026. The upcoming change in Fed leadership is just one factor contributing to a generally dovish outlook on federal funds rate expectations.”

The Australian dollar and New Zealand dollar both started the new year on a positive note. The Australian dollar picked up 0.1% to $0.66805, having risen nearly 8% in 2025, marking its best annual showing since 2020.