Key Moments
- The dollar starts the new year supported by geopolitical tensions, especially events in Venezuela.
- EUR/USD slipped below 1.1700, while USD/JPY rose above 157.00, reflecting early dollar-positive flows.
- Despite this strength, the dollar faces headwinds later in 2026 from de-dollarisation, fiscal worries, and anticipated Fed rate cuts.
Early Trading Favors the Dollar
As 2026 begins, the dollar is expected to weaken over time. Many of the forces that influenced 2025 remain in play. However, near-term geopolitical risk is dominating. Investors are watching Venezuela closely. This attention is helping support the greenback at the start of the week.
In the first sessions, flows favored the dollar. EUR/USD fell below 1.1700, while USD/JPY moved above 157.00. These moves show caution in broader markets and a willingness to hold dollars for now.
| Currency Pair | Recent Move | Key Level Mentioned |
|---|---|---|
| EUR/USD | Falling | Below 1.1700; 100-day MA at 1.1663 |
| USD/JPY | Rising | Above 157.00 |
Yen Dynamics: Policy Tug-of-War in Japan
USD/JPY is closely watched as Japan navigates a tricky policy environment. The prime minister seeks expansionary fiscal measures. Meanwhile, the central bank is considering higher interest rates. This tension keeps policy signals mixed.
For now, the weaker yen trend seems likely to continue. As long as the policy divergence persists, USD/JPY may stay elevated.
EUR/USD Under Pressure
EUR/USD extended its recent decline after failing to break above 1.1800 in late December. This rejection reinforced a bearish near-term tone.
Traders now focus on the 100-day moving average at 1.1663. It is an important support level for the week. As long as EUR/USD trades below recent highs and near that average, the short-term bias remains down.
Dollar Outlook: Structural Headwinds Ahead
Beyond geopolitical developments, broader macro factors pose challenges for the dollar in early 2026. De-dollarisation, fiscal concerns, unclear policy signals, expected Fed rate cuts, and political risks ahead of midterms all weigh on the greenback.
Thus, any support from geopolitical tensions is likely temporary. Such events can boost dollar demand briefly but do not create a lasting foundation for strength.
Major Currencies Face Vulnerabilities
The dollar’s challenges do not mean other major currencies are safe. The euro faces a weak regional economy and stagflation pressures, especially in Germany. Political strains in France complicate the euro area’s policy response.
In the UK, a cost-of-living crisis and fiscal concerns remain. The autumn budget eased some pressure but underlying issues persist.
Japan also faces structural problems. Fiscal and debt concerns remain, alongside tension between the government and Bank of Japan over interest rates. The yen remains vulnerable despite ongoing policy debates.
Relative Trade: Seeking the “Cleanest Shirt”
Overall, 2026 looks like a contest among flawed economies and policy frameworks. No single currency stands out as fundamentally strong. Markets will likely focus on which currency is least impaired at any moment—the “cleanest shirt” in a pile of dirty laundry.
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