Dollar Heads for Weekly Loss Amid Geopolitical Strain

Written by Sandra Leggero

Sandra Leggero has a background in financial markets, having spent more than 9 years in commodities trading for several European and Asian companies. She holds a degree in Economics from the University of Pavia and specializes in emerging markets.

, | Updated: January 23, 2026

Key Moments

The Dollar Index traded at 98.170, setting up a weekly decline near 1%—its biggest drop since June 2025.
GBP/USD hovered near 1.3497 after UK retail sales rose 0.4% in December, beating expectations for a 0.1% fall.
The Bank of Japan held its key rate at 0.75% and raised its growth outlook, but the yen stayed weak.

Dollar Weakens as Political Tensions Rise

The U.S. dollar drifted lower on Friday and looked set for its biggest weekly drop since June. Geopolitical strains pressured U.S. assets and reduced demand for the dollar.

At 04:00 ET (09:00 GMT), the Dollar Index stood at 98.170. This level points to a weekly loss near 1%, marking its worst weekly performance since June 2025.

Investors continued to move away from the dollar as political tensions intensified, especially over the Trump administration’s stance toward European partners.

The U.S. president reportedly agreed to a deal on Greenland access, stepping back from earlier threats of tariffs and force. Yet, the move sparked backlash from European officials.

Europe’s unease was highlighted after reports that ECB President Christine Lagarde walked out of a World Economic Forum dinner in Davos. The walkout followed a sharp speech by U.S. Commerce Secretary Howard Lutnick, who criticized Europe.

Strategists See More Pressure on the Dollar

Analysts at ING said the FX backdrop is driven by three main forces: a risk-on outlook for 2026, a dollar debasement narrative, and weak fiscal positions.

They said the dollar looks poorly positioned under these themes. “The dollar is on the wrong side of the ledger for all three forces,” ING added.

Still, ING noted that strong U.S. consumption or activity data could delay Fed cuts and give the dollar a short-term boost. However, they expect the dollar’s decline to resume from Q2 onward.

Sterling Gains After Strong UK Retail Data

In European trading, GBP/USD rose 0.1% to 1.3497, near a two-week high. The move followed stronger-than-expected UK retail sales, signaling improving domestic momentum.

Retail sales volumes rose 0.4% in December compared to November. This was the first monthly gain since September and well above forecasts for a 0.1% drop.

Meanwhile, consumer confidence rose to its highest level since August 2024, according to market research firm GfK.

Euro Pulls Back Despite Solid PMI

EUR/USD slipped 0.1% to 1.1742, easing from the three-week high reached earlier in the week. The move came even though eurozone data remained solid.

The eurozone composite PMI held at 51.5 in January, staying in expansion territory.

Traders kept an eye on technical levels. ING noted that 1.1770/1780 is near-term resistance. A break above 1.1810 could force a reassessment of the outlook.

Currency Pair	Latest Level	Move	Context
Dollar Index	98.170	Marginally lower	On track for ~1% weekly loss
GBP/USD	1.3497	+0.1%	Near two-week high after UK retail data
EUR/USD	1.1742	-0.1%	Pulling back despite solid PMI
USD/JPY	158.37	Flat	Little reaction to BOJ decision
USD/CNY	6.9644	-0.1%	Yuan midpoint below 7 for first time since 2023
AUD/USD	0.6841	Slightly higher	Modest gains in Asia-Pacific FX
USD/NZD	0.5900	-0.4%	Kiwi firmer versus U.S. dollar

BOJ Holds Rates Steady as Yen Remains Weak

USD/JPY stayed around 158.37 after the Bank of Japan kept its key rate at 0.75%. The decision was widely expected.

The BOJ also raised its inflation and growth outlook slightly for 2025 and 2026. It said government spending could support the economy.

Still, the yen gained little benefit from the update. Concerns about Japan’s heavy fiscal burden kept pressure on the currency. Japanese government bonds faced heavy selling during the week, amid speculation of further strain under Prime Minister Sanae Takaichi.

Additional pressure came from weak headline inflation, which fell to its lowest level since early 2022. However, core inflation stayed above the BOJ’s 2% target.

China and Commodity Currencies

USD/CNY dipped 0.1% to 6.9644 after the People’s Bank of China set the daily yuan midpoint below 7 for the first time since 2023. This suggests stronger support for the yuan.

In the commodity-linked space, AUD/USD rose to 0.6841, while USD/NZD fell to 0.5900.