The dollar extended its decline against major currencies during the first trading session of 2026, as thin liquidity amplified moves and traders recalibrated positions for a year of anticipated central bank divergence. The euro and sterling gained ground while the yen exhibited heightened volatility, according to market participants tracking policy signals from major central banks.
Market analysts note that the Federal Reserve's dovish pivot late in 2025 continues to weigh on the greenback, with futures markets pricing in additional rate cuts through the first half of the year. Meanwhile, European Central Bank officials have pushed back against aggressive easing expectations, creating a policy contrast that strategists say favors euro strength. "The ECB's messaging remains notably more hawkish than the Fed's, and that's driving relative yield differentials," said a senior currency strategist at a major European bank.
Technical analysts highlight that EUR/USD has breached a key psychological barrier established during December's range-bound trading, with momentum indicators suggesting further upside potential. GBP/USD similarly climbed as traders absorbed better-than-expected UK manufacturing data released earlier this week. In contrast, USD/JPY whipsawed in volatile session lows as speculation intensified over the Bank of Japan's next policy move, with some market participants positioning for a potential rate adjustment at the January meeting.
Commodity markets reflected the dollar's weakness, with gold trending higher as investors sought alternative stores of value. Oil prices stabilized after recent volatility, while Bitcoin exhibited sharp intraday swings characteristic of holiday-thin order books. Looking ahead, traders are monitoring upcoming speeches from Fed and ECB officials scheduled for next week, which strategists say could set the tone for the first quarter. Market positioning data suggests hedge funds have maintained bearish dollar bets entering the new year, though some analysts caution that extreme positioning could trigger corrective moves.
Disclaimer: This analysis is AI-generated for educational purposes. Traders should verify all information and conduct their own research before making trading decisions.