U.S. Dec 02 : The U.S. dollar made a soft start to 2026 on Friday after posting its sharpest annual decline in eight years, as narrowing interest rate differentials and growing expectations of U.S. rate cuts continued to weigh on the currency.
The yen steadied near 10-month lows, while most major currencies held firm against the greenback as investors awaited key economic data later this month to assess the future path of global interest rates.
A shrinking gap between U.S. rates and those of other major economies has dampened demand for the dollar, allowing most currencies to register strong gains in 2025, with Japan’s yen the notable exception.
The euro was steady at $1.1752 in early Asian trade after surging 13.5% last year, its strongest annual performance since 2017. Sterling last traded at $1.3474, having climbed 7.7% in 2025 also its best yearly gain in eight years.
The yen was last quoted at 156.74 per dollar, remaining close to the 10-month low of 157.90 touched in November, a level that previously triggered concerns of currency intervention by Japanese authorities. While repeated verbal warnings from Tokyo helped pull the yen away from intervention territory late last year, traders say those risks have not entirely faded.
With markets in Japan and China closed, trading volumes were thin during Asian hours, keeping currency moves muted.
Anthony Doyle, chief investment strategist at Pinnacle Investment Management, said the global economy enters 2026 with relatively solid momentum and a low probability of recession.
“Outside the United States, the central bank rate-cut impulse is fading, which is not a bug but a feature,” Doyle said. “Fewer rate surprises reduce one-way market moves and increase the importance of selection across regions, factors and asset classes.”
The dollar index, which measures the U.S. currency against six major peers, stood at 98.243 after plunging 9.4% in 2025—its biggest annual drop since 2017. The decline was driven by U.S. interest rate cuts, uncertainty around trade policy, and concerns over the Federal Reserve’s independence under President Donald Trump.
Investors are now turning their attention to upcoming U.S. economic data, including payrolls and weekly jobless claims due next week, which are expected to provide clues on labour market strength and the trajectory of U.S. interest rates this year.
Focus is also building around Trump’s choice for the next Federal Reserve chair, with Jerome Powell’s term set to end in May. Markets expect Trump’s nominee to adopt a more dovish stance, following repeated criticism of the Fed last year for not cutting rates aggressively enough.
Traders are currently pricing in two U.S. rate cuts in 2026, compared with just one projected by a divided Federal Reserve.
Goldman Sachs strategists said concerns around central bank independence are likely to persist this year, adding that leadership changes at the Fed skew risks toward a more dovish policy outlook.
Meanwhile, the Australian and New Zealand dollars both began the year on a positive footing. The Australian dollar rose 0.1% to $0.66805, extending gains after nearly an 8% rise in 2025—its strongest performance since 2020.
The New Zealand dollar, which snapped a three-year losing streak with a near 3% gain last year, was little changed at $0.5755.