The U.S. dollar got off to a subdued start in 2026 on Friday, extending weakness after its sharpest annual decline in eight years, as currency markets turned their attention to U.S. interest-rate expectations and the looming change in Federal Reserve leadership. Meanwhile, the Japanese yen steadied near multi-month lows as investors awaited key economic data later this month for guidance on the future path of monetary policy.
A narrowing interest-rate differential between the United States and other major economies has weighed heavily on the greenback, allowing most currencies to post significant gains against the dollar in 2025. The yen was a notable outlier, underperforming despite broad dollar softness.
In early Asian trading, the euro held steady at $1.1752 after surging 13.5% last year, its strongest annual performance since 2017. Sterling was last trading at $1.3474, following a 7.7% rise in 2025, also marking its steepest yearly gain in more than eight years. Both currencies benefited from expectations that U.S. interest rates will fall further while European and British policymakers maintain a more cautious stance.
The yen was quoted at 156.74 per dollar, having gained less than 1% against the greenback in 2025. It remains close to a 10-month low of 157.90 touched in November, levels that previously triggered speculation about possible currency intervention by Japanese authorities.
The dollar index, which tracks the U.S. currency against six major peers, stood at 98.243. The index fell 9.4% in 2025—its largest annual drop since 2017—as investors reacted to a combination of U.S. interest-rate cuts, erratic trade policy signals, and growing unease about the Federal Reserve’s independence under President Donald Trump’s administration.
Attention now turns to a series of U.S. economic releases due next week, including the closely watched payrolls report and weekly jobless claims. These data points are expected to offer fresh insight into the health of the U.S. labor market and help shape expectations for where interest rates may settle by the end of the year.
Adding to uncertainty, markets are closely watching who President Trump will nominate as the next Federal Reserve Chair, with current Chair Jerome Powell’s term set to expire in May. Investors widely expect Trump’s pick to adopt a more dovish stance, favoring deeper and faster rate cuts. Trump repeatedly criticized Powell and the Fed last year for what he described as an overly cautious approach to easing monetary policy.
Traders are currently pricing in two U.S. interest-rate cuts in 2026, compared with the Federal Reserve’s own projections, which point to just one cut amid internal divisions among policymakers.
“We expect concerns around central bank independence to persist into 2026,” Goldman Sachs strategists said in a note. “The upcoming change in Fed leadership is one of several factors skewing risks around our Fed funds rate forecast to the dovish side.”
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