US Dollar Gains Momentum as Year Begins

Following a downward trend from late November through late December, the US dollar has started the new year with increased strength. The recent positive reversal of late 2025 losses is largely supported by data indicating that, similar to last year, the Federal Reserve is expected to maintain an extended pause in policy adjustments well into the second quarter. Although geopolitical issues—such as US actions in Venezuela and tensions regarding Greenland—remain prominent in discourse, their direct influence on markets appears limited. Notably, February WTI crude oil prices rose approximately 3.7% last week, marking the largest weekly gain since October and extending the third consecutive week of gains, a streak not seen since mid-2024.

The US Supreme Court refrained from issuing a ruling on the president’s emergency powers to impose broad tariffs, and the risk of a federal government shutdown looms if Congress fails to agree on funding by month-end. This week features key US economic reports, including CPI, PPI, industrial production, and retail sales data. Price pressures are anticipated to remain firm, with economic activity showing potential sequential improvement.

Regional Economic and Currency Developments

Eurozone Overview

The euro encountered resistance near $1.18 during late December, with improvements in the PMI stalling despite robust German factory orders and industrial output in November. Over the past month, euro fluctuations have exhibited a stronger inverse correlation with changes in US Treasury yields than with their German counterparts. Upcoming eurozone reports on aggregate industrial production and trade figures are expected to reveal tapering growth, as the 0.8% increase in manufacturing output recorded in October is unlikely to be repeated. Despite shifts in US trade policy and China’s economic moves, the eurozone’s trade surplus through October 2025 held steady relative to 2024 levels.

Technically, the euro declined to just below $1.1620 before the weekend, approaching its 61.8% retracement of the rally since late November. Momentum indicators remain negative, suggesting continued downside risk. The 200-day moving average near $1.1575 remains a key support level, which the euro has not breached since early March 2025.

China’s Currency and Trade Dynamics

Beijing continues to facilitate a gradual appreciation of the yuan primarily through a downward adjustment of the US dollar daily reference rate. Market expectations gravitate towards a fix near CNY7.0, permitting the dollar to trade as low as CNY6.86 within the allowed band. China’s upcoming trade figures are politically sensitive, with year-to-date surpluses averaging $97.8 billion monthly through November—up from $80.7 billion the previous year. November exports advanced 5.9% year-over-year, outpacing the 1.9% growth in imports.

The People’s Bank of China set the dollar’s reference rate at its lowest level since October 2024 last week, at CNY7.0128. The offshore yuan (CNH) consolidated near a trough at 6.9665 on January 2, a level not reached since mid-2023. The PBOC’s efforts to encourage yuan strength appear ongoing, with a potential market target near CNH6.90, while the 2023 low hovered around CNH6.70.

Japan’s Currency and Economic Indicators

The correlation between changes in the dollar-yen exchange rate and US 10-year Treasury yields peaked near 0.80 last August but declined significantly by late December, now fluctuating near 0.35. Meanwhile, the correlation with Japan’s own 10-year yields has been volatile. Political developments may influence market dynamics, with Prime Minister Takaichi reportedly considering dissolving the lower house earlier than previously expected, possibly influenced by heightened tensions with China.

Japan will release its November current account surplus on January 13, typically narrowing in that month but having widened in recent years. Despite the current account surplus, Japan continues to register a trade deficit in balance of payments terms. December producer prices, reported on January 15, rose 2.7% year-over-year in November and remain more persistent than consumer prices. Market-implied odds suggest around a 35% probability of a further interest rate increase by April, with approximately 40 basis points of tightening priced in for 2026.

The US dollar breached JPY158 following recent jobs data, surpassing the highs seen in late 2025. Option expirations clustered around JPY158 and JPY158.90 may influence short-term volatility. While Ministry of Finance officials may issue verbal warnings regarding the yen’s exchange rate, intervention remains a cautious prospect. Momentum indicators currently favor further dollar strength.

United Kingdom Economic and Currency Update

Sterling’s recent movements exhibit a stronger inverse correlation with the Dollar Index than with the euro, and it is more responsive to changes in the US two-year Treasury yield than to UK counterparts. November’s monthly GDP data, due in the coming week, is expected to record a 0.1% increase—the first since June 2025—supported by stronger services activity and a reduced trade deficit, offsetting industrial softness. The construction sector may have stabilized following a significant contraction in October.

Sterling has experienced a four-day decline after peaking above $1.3400 early this month. Trading just above its 200-day moving average near $1.3395, sterling faces retracement targets at $1.3365 (38.2%) and $1.3300 (50%). Technical momentum points to potential for further depreciation, with the five-day moving average poised to cross below the 20-day average for the first time since late November.

North American Currency and Economic Context

Canadian Dollar Performance

The Canadian dollar has underperformed among G10 currencies, declining approximately 1.25% in 2026 thus far. US influence over Venezuela’s oil economy introduces competitive pressures on Canada, the world’s largest producer of heavy crude. The USD-CAD exchange rate shows a moderate correlation around 0.50 with the Dollar Index and greater sensitivity to changes in Canada’s two-year yields than to US equivalents. Risk sentiment also plays a role, with the exchange rate exhibiting an inverse correlation near -0.35 with the US S&P 500 index.

Canadian economic releases this week include November building permits and December housing market data. While typically of limited immediate market impact, portfolio flow reports reveal a slowdown in capital inflows concurrent with a worsening trade deficit. Despite this, foreign demand for Canadian bonds and equities strengthened in the second half of 2025.

Technically, the US dollar looks set to continue its corrective advance against the Canadian dollar, having surpassed the 50% retracement level just above CAD1.3885. The next resistance lies near CAD1.3945, within a congested zone from early December. Momentum indicators support price appreciation towards last month’s high near CAD1.4015.

Australian Dollar Insights

The Australian dollar maintains a moderate correlation with the Dollar Index, similar to last year’s range, and is more closely tied to domestic two-year yields than to US rates. Correlations with commodity prices favor gold slightly over copper.

Key drivers remain Australia’s strong household spending, which surged 1.3% in October—the largest increase since early 2024—with a year-over-year rate climbing to 5.6%. Consumer inflation expectations in Melbourne remain elevated near the upper end of the two-year range.

Despite briefly reaching highs above $0.6765 early last week, the Australian dollar reversed lower, closing just above the 20-day moving average (~$0.6680) ahead of the weekend. Support is noted near $0.6665, with technical retracement levels at $0.6635 and $0.6600 serving as potential downside targets.

Emerging Market Currency Developments

Mexican Peso Evaluation

The Mexican peso’s relative robustness appears attributable to attractive yields and low volatility profiles, although isolating precise drivers remains challenging. Over the prior 30 days, the peso’s movements against the dollar have shown a modest inverse correlation with US two-year Treasury yields and a positive correlation with other funding currencies like the yen and Swiss franc. Legally, changes in the dollar-peso exchange rate correlate moderately with the Dollar Index.

In terms of data, Mexico will publish December nominal wage growth and October private consumption figures. Notably, Mexico’s minimum wage has increased by double digits annually since 2017, with a 13% rise planned for this year, though regional disparities persist. A substantial portion of the labor market operates within the informal sector. Private consumption rebounded in the latter half of 2025 after several months of contraction.

Technically, the dollar posted a marginal new four-week high near MXN18.04 before stabilizing below MXN18.00. The five-day moving average approaches a crossing above the 20-day average, suggestive of a consolidative phase. Near-term resistance is anticipated around MXN18.09, with a more definitive break above MXN18.14–15 required to test weaker peso positions.

Summary

The early 2026 landscape for major currencies reflects a combination of economic data releases, central bank policies, and geopolitical considerations shaping market trajectories. The US dollar shows renewed strength underpinned by expectations of a Federal Reserve pause, while regional currencies navigate domestic fundamentals and global influences with varying degrees of sensitivity. Technical indicators and yield differentials continue to provide valuable guidance on potential near-term movements across currency markets.