Dollar Steadies Early In 2026 After Tough Year

(MENAFN- The Arabian Post) Arabian Post Staff -Dubai

Dollar trading opened the new year on firmer ground on Friday, extending a modest rebound after a bruising twelve months that marked its weakest annual performance in eight years, as investors reassessed the outlook for United States interest rates and global growth.

The greenback edged higher against a basket of major peers in early European dealings, with the yen drifting back towards levels last seen in the spring and the euro slipping slightly after gains built up over the previous year. Market participants described the move as cautious rather than decisive, reflecting thin liquidity and lingering uncertainty over policy direction in Washington.

Currency strategists said the dollar's fragile recovery followed heavy selling through much of last year, when expectations of rate cuts by the Federal Reserve and easing inflation undercut the yield advantage that had supported the currency in earlier cycles. At the same time, improving growth prospects outside the United States encouraged investors to rotate towards higher-yielding or undervalued alternatives.

Against the yen, the dollar climbed back towards the upper end of its trading range, hovering near a ten-month high. The Japanese currency has remained under pressure amid a persistent gap between domestic borrowing costs and those in the United States, even as Tokyo has signalled a gradual move away from ultra-loose policy. Traders noted that the yen's slide was less abrupt than in past episodes, reflecting continued sensitivity to the risk of official intervention.

The euro eased after a strong performance last year, when slowing inflation and steady growth in parts of the euro zone boosted confidence in the region's economic resilience. Analysts cautioned that the single currency's trajectory would depend heavily on whether European policymakers deliver further easing or pause to assess wage pressures and fiscal spending plans.

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Sterling traded in a narrow band, supported by signs of stabilising inflation but weighed by questions over the durability of domestic growth. Emerging market currencies showed mixed moves, with higher-yielding units holding up better as investors searched for carry opportunities, while those linked to commodities reacted to softer prices in energy and metals.

Market focus remains fixed on forthcoming United States data releases, including employment and inflation indicators that could shape expectations for policy adjustments later in the year. While inflation has moderated from its peak, officials have stressed that decisions will be driven by incoming data rather than preset timelines, a stance that has kept rate forecasts in flux.

Some investors argue that the dollar's decline last year went too far, pointing to the size and liquidity of United States markets and the economy's capacity to absorb tighter financial conditions. Others counter that structural forces, including a narrowing growth gap with other advanced economies and rising fiscal deficits, could cap any sustained rebound.

Central banks outside the United States are also recalibrating. In Japan, policymakers are weighing how quickly to normalise after years of stimulus without destabilising markets. In Europe, debates continue over balancing support for growth with the need to anchor inflation expectations. These cross-currents have injected volatility into foreign exchange markets, even as overall trading ranges remain narrower than during periods of crisis.

Commodity prices have added another layer of complexity. Oil has softened amid ample supply, trimming support for currencies of major exporters, while gold's pullback has reduced its appeal as a hedge against currency weakness. Equity markets have started the year on a cautious note, reinforcing demand for safe and liquid assets.

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