The US dollar began trading in the new year, 2026, with a slight rise on Friday, attempting to recover some of the losses it incurred during the previous year. This corrective move comes after a year that saw a significant decline in the greenback against a basket of major currencies, at a time when investors and traders in global markets are awaiting new signals regarding the direction of monetary policy and interest rates in the coming period.
Currency performance and interest rate impact in 2025
The year 2025 witnessed significant shifts in the foreign exchange market, as the narrowing interest rate differential between the United States and other major economies put selling pressure on the dollar. Historically, interest rates have been the primary driver of capital flows, with investments typically flowing towards higher-yielding currencies. As global central banks adjusted their monetary policies and narrowed the gap with the US Federal Reserve, most currencies appreciated sharply against the dollar, with the exception of the Japanese yen, which continued to face particular pressure.
The euro and the pound sterling: best annual performance in years
Among European currencies, the euro dipped slightly by 0.2% on the first trading day of the year, but this decline follows an exceptional year in which it gained 13.5% in 2015. Similarly, the British pound sterling saw a significant jump of 7.7% in the same year. These figures are a significant indicator, as both the euro and the pound recorded their highest annual gains since 2017, reflecting a recovery in confidence in European economies and expectations of stable monetary policies in the region.
Japanese yen and Pacific Rim currencies
Meanwhile, the Japanese yen continued its downward trend, falling to its lowest level in 10 months, highlighting the ongoing divergence in monetary policies between Japan and other advanced economies. In the Pacific region, the Australian dollar rose 0.5%, buoyed by projected annual gains of nearly 8% in 2025, its strongest performance since 2020. The New Zealand dollar also broke a three-year losing streak, gaining 3% last year, and settled virtually unchanged in today's trading.
Future outlook for markets
Economic analysts are now focused on upcoming US economic data, which will play a crucial role in determining the Federal Reserve's policy direction. Experts suggest that any signs of slowing inflation or a weakening labor market could put renewed pressure on the dollar, while strong data could bolster its status as a safe haven and a high-yielding currency, making the first weeks of 2026 pivotal in shaping the currency markets for the year.
