Dollar rebounds sharply at the start of the new year

On January 2, the US dollar began 2026 with a notable rise, recovering from last year’s decline against most major currencies, as investors await a key week of economic data that could shape Federal Reserve policy and global markets, Reuters reported.

Dollar regains ground

The rebound follows the sharpest annual decline since 2017, with losses exceeding 9 percent. The earlier drop was driven by a narrowing interest rate gap with other economies, persistent concerns over the US fiscal position, fears of a global trade war, and risks related to the independence of the Federal Reserve, all of which remain relevant this year.

What about Fed rates?

A heavy flow of data next week, particularly the US employment report due on January 9, is expected to provide clearer signals on whether the Federal Reserve will further cut interest rates. Markets are already pricing in two rate cuts, although the divided central bank has officially projected only one.

“This will be a good time for a lot of reassessments. There is no Fed meeting until the end of the month, but there is still no clear consensus,” said Juan Perez, trading director at Monex USA in Washington.

According to him, the prolonged and unprecedented US government shutdown has significantly affected the collection, interpretation, and overall reliability of economic data. Trading volumes were also subdued on January 2 due to market holidays in Japan and China.

The dollar index, which measures the greenback against a basket of major currencies, rose 0.24 percent to 98.48. The euro slipped 0.25 percent to $1.1716.

Euro

Survey results showed that manufacturing activity in the eurozone fell to a nine-month low in December. Despite this, the euro rose by more than 13 percent last year, marking its strongest annual gain since 2017.

Pound sterling

After gaining 7.7 percent in 2025, the pound sterling fell 0.18 percent to $1.3445, also marking its largest annual increase since 2017. Investors are also closely watching whom US President Donald Trump will appoint as the next Federal Reserve chair, as the current chair Jerome Powell’s term expires in May.

Trump is expected to announce his nominee later this month. Most market participants anticipate that Trump will favor a candidate supportive of further rate cuts, as he has repeatedly criticized Powell and the Federal Reserve for not reducing borrowing costs more quickly and aggressively.

Traders are now fully pricing in two rate cuts this year, compared with the single cut projected by the divided Federal Reserve Board.

“We expect concerns over central bank independence to persist in 2026, and we view the upcoming leadership change at the Fed as one of several reasons why risks to our Fed rate outlook are skewed to the downside,” Goldman Sachs strategists wrote in a note to clients.

Yen as an exception

The Japanese yen weakened by 0.16 percent to 156.91 per dollar, after rising by less than 1 percent against the greenback in 2025. It remained close to its 10-month low of 157.89 reached in November, a level that has drawn the attention of policymakers and increased expectations of possible intervention by the Bank of Japan.

The Bank of Japan raised interest rates twice last year, but this did little to support the yen, as investors appear to be expecting a more aggressive pace of tightening.

According to data from LSEG, markets are assigning a more than 50 percent probability to another rate hike by the Bank of Japan before July.

Among cryptocurrencies, bitcoin rose 1.64 percent to $89,741.61.