2026-01-05 17:44:00
The U.S. dollar kicked off 2026 near its weakest levels since October 2025, extending a rough stretch that saw the Greenback lose about 9% in 2025, marking its worst annual performance in nearly a decade.
What’s behind this dollar weakness, and what can turn the tide in the coming weeks?
Let’s break down the three major themes that are likely to drive USD behavior this January:
1. Fed Rate Cuts and Leadership Drama
The Fed cut rates THREE times in 2025, bringing the federal funds rate down to a range of 3.50%-3.75%.
Over the next few weeks, you can bet that trading newbies and pros alike will try to guess how many more rate cuts are in store in 2026.
The Fed’s own projections suggest just ONE more quarter-point cut for the entire year. However, there’s a huge divide among Fed officials.
Some policymakers want to pause rate cuts completely, worried about inflation that’s still running above the Fed’s 2% target. Others think the weakening job market justifies more aggressive easing.
For now, markets are pricing in around two rate cuts for 2026. But keep in mind that Fed Chair Jerome Powell’s term expires in May 2026, and President Trump is expected to announce his nominee for the next Fed chair in early January.
Why this matters for traders: The anticipation of a potentially more dovish Fed chair could weaken the dollar further in the near term.
If Trump appoints someone who favors lower rates, markets will price that in quickly. But if the Fed pauses cuts in January (which most analysts expect), we could see a short-term dollar bounce.
2. Tariff Policy Chaos
Throughout 2025, we saw a wild ride of tariff announcements, delays, and reversals. Just this past week, Trump signed a presidential proclamation delaying increases in tariffs on furniture, kitchen cabinets, and vanities that were scheduled for January 1, 2026. These tariffs are now pushed back until January 2027. Yipes!
Meanwhile, the U.S. Supreme Court is evaluating the legality of Trump’s sweeping tariffs, with a ruling expected in early 2026. If the Court strikes down these tariffs, it could force major policy changes—though the administration has alternative legal pathways available.
Economic theory suggests tariffs should strengthen a currency, but that’s not what we’re seeing. Instead, the constant policy flip-flops and legal uncertainty are undermining confidence in the dollar.
Why this matters for traders: Tariff headlines will continue to create volatility in January. Watch for Supreme Court news and any new trade announcements. The uncertainty itself is arguably more damaging to the dollar than the tariffs themselves.
3. Diminishing Appeal as Global Growth Improves
For years, the U.S. had a massive advantage—stronger economic growth and higher interest rates than other major economies. That attracted capital flows into dollar assets, supporting the Greenback. Today, that edge has faded as many major economies seem to be slowly edging away from sliding into economic weakness and inflation conditions remain above target.
At the same time, the Federal Reserve plans to gradually cut interest rates, while some other major central banks could be moving in the other direction, narrowing the interest rate differential that previously favored the dollar.
Why this matters for traders: Keep an eye on economic data releases from Europe, Japan, and other major economies. Positive surprises abroad could put additional pressure on the dollar.
What to Watch in January
For traders, January sets up as a potentially choppy month for the dollar.
The consensus view leans toward continued dollar weakness, but don’t be surprised by short-term bounces, especially if the Fed strikes a hawkish tone at its January 28-29 meeting or if tariff uncertainty eases.
Stay flexible, watch for headline risk, and remember that the dollar’s path in 2026 will depend heavily on how these three themes evolve. As always in forex, it’s not just about what happens—it’s about what happens relative to expectations.
Disclaimer: The analysis above is provided for educational and informational purposes only. It is not intended as investment or trading advice, nor should it be interpreted as a recommendation to take any position in the market. The goal of this content is to help readers become aware of recent economic developments that may influence market behavior. These insights are designed to support the development of each trader’s own scenarios and directional biases, which may require further analysis and due diligence before acting upon.
All trading decisions—including entry, exit, risk management, and position sizing—are entirely the responsibility of the individual trader. The scenarios and interpretations discussed may not be suitable for all trading strategies, risk profiles, or portfolio objectives. Past market behavior does not guarantee future results. Please trade responsibly and at your own risk.
