Key Points
- The U.S. dollar began 2026 on a weak note, following its worst year since 2017.
- The dollar index fell 9.4% in 2025, driven by narrowing interest rate spreads and political uncertainty.
- The euro and the British pound both had their best year against the dollar in eight years.
- Investors are focused on who President Trump will appoint as the next Federal Reserve chair.
The U.S. dollar kicked off 2026 with a whimper, continuing the weak trend that dominated most of last year. In 2025, the dollar fell sharply against most other major currencies. The main reason for this drop is that the gap between U.S. interest rates and those in other countries is narrowing. Additionally, President Trump’s unpredictable trade policies and constant criticism of the Federal Reserve have unsettled investors.
The euro and the British pound both had their best year against the dollar since 2017. The euro surged 13.5% in 2025, while the pound gained 7.7%. The dollar index, which measures the U.S. dollar against a basket of currencies, fell 9.4% last year, its largest annual decline in eight years.
The one currency that had a weak year was the Japanese yen. It hovered near a 10-month low for a while, and the Tokyo government even had to issue warnings to prevent it from falling further.
As we head into the new year, all eyes are on the Federal Reserve. Investors are awaiting the latest U.S. jobs report, which will provide a clearer view of the economy’s performance. The biggest question, however, is who President Trump will appoint as the next Fed Chair.
Jerome Powell’s term is up in May, and Trump is expected to choose someone who will cut interest rates more aggressively. Traders are already betting on two rate cuts in 2026, even though the Fed itself has only predicted one.
With the markets in Japan and China closed for the holiday, trading was very quiet on Friday. Most experts expect the global economy to continue growing in 2026, but the dollar’s outlook will largely depend on the Fed’s next move.
