The dollar began 2026 on a weak note in early Friday trading, after struggling against most currencies last year, while the yen held near its lowest level in 10 months as traders awaited economic data this month to speculate on the path of interest rates.
The narrowing interest rate differential between the United States and other economies has cast a shadow over the currency market, causing most currencies to rise sharply against the dollar in 2025, with the exception of the yen.
The euro traded at $1.1752 in early Asian trading hours after rising 13.5 percent last year, while the pound sterling was last at $1.3474 after a 7.7 percent increase in 2025. Both currencies recorded their highest annual gains since 2017.
The yen was last trading at 156.74 against the dollar after rising less than 1 percent against the U.S. currency in 2025, and hovered near its lowest level in 10 months at 157.90, which it touched in November and which raised concerns about government intervention.
Strong verbal warnings from authorities in Tokyo during December succeeded in pushing the yen away from the intervention zone, but those concerns remain.
With markets closed in Japan and China, trading volumes are likely to be thin and movements subdued during Asian hours.
Anthony Doyle, chief investment analyst at Pinnacle Investment Management, said the global economy is entering 2026 with reasonable momentum and the likelihood of a recession is declining, according to Reuters.
Outside the United States, the drive of central banks to cut interest rates is fading, which is an advantage rather than a disadvantage. Fewer interest rate surprises reduce one-way market movements and increase the importance of selection across regions, factors, and asset classes.
The dollar index, which measures the performance of the US currency against six other currencies, reached 98.243 after recording a 9.4 percent decline in 2025, its biggest drop in eight years, affected by interest rate cuts, erratic trade policies, and concerns about the independence of the Federal Reserve (the US central bank) under the administration of President Donald Trump.
Economic data, including the US jobs report and unemployment figures, are due next week, which will provide indications of the strength of the labor market and how far US interest rates may end up this year.
Much of the focus in the first part of the year will also be on who Trump chooses to head the Federal Reserve, as current chairman Jerome Powell's term ends in May.
Investors are bracing for Trump's choice to be more inclined towards monetary easing and lowering interest rates after the US president repeatedly criticized the Federal Reserve and Powell last year for not cutting interest rates quickly and by large amounts.
The Australian dollar rose 0.1 percent to $0.66805 after gains of nearly 8 percent in 2025, its strongest annual performance since 2020.
The New Zealand dollar ended a three-year losing streak, rising nearly 3 percent last year. It was little changed on Friday, settling at $0.5755.
