The U.S. dollar began 2026 on a modestly positive note Monday, with the Dollar Index (DXY) rising to 98.6 as currency traders weigh whether the greenback can stage a meaningful recovery after its steepest annual decline in eight years.

The dollar shed approximately 9.3% in 2025, weighed down by a confluence of factors that turned what many expected to be a year of dollar strength into a rout. Policy uncertainty following President Trump's tariff measures, rising expectations of Federal Reserve rate cuts, a narrowing yield advantage over peer currencies, and investor concerns about Fed autonomy all contributed to the slide.

A Fragile Start to the New Year

While the DXY posted a gain of roughly 0.3% in the first few trading sessions of 2026, currency strategists remain divided on whether this marks the beginning of a sustained recovery or merely a brief respite in a longer bearish trend.

"Coming into 2026, it's really easy to be a USD bear, and like we saw last year, that can be a dangerous backdrop as much of that hope for rate cuts is probably already factored into the currency's price."

— Senior forex strategist at a major investment bank

The dollar found support Monday from geopolitical developments, including the U.S. capture of Venezuelan leader Nicolás Maduro over the weekend. The news prompted safe-haven flows and pushed the DXY to its highest level since mid-December. The Mexican peso fell sharply as regional geopolitical tensions escalated.

The Fed Factor

Federal Reserve policy remains the dominant variable in dollar forecasting. The central bank cut rates twice in late 2025, bringing the federal funds rate to a range of 3.5% to 3.75%—75 basis points lower than a year ago. Markets are currently pricing in two additional quarter-point cuts in 2026, though Fed officials themselves project only one reduction.

Minneapolis Fed President Neel Kashkari added to the policy uncertainty Monday, stating that he believes the Fed is "pretty close to neutral" and suggesting further rate cuts may not be necessary. His comments contrast with those of Philadelphia Fed President Anna Paulson, who said modest additional cuts could be appropriate later in the year.

Perhaps more significant for dollar traders is the looming change in Fed leadership. Chair Jerome Powell's term expires on May 15, 2026, and President Trump has said he will announce a successor in early January. The leading candidates—National Economic Council Director Kevin Hassett and former Fed Governor Kevin Warsh—hold different views on monetary policy, adding another layer of uncertainty.

Tariff Wild Cards

Trade policy continues to cast a long shadow over dollar forecasts. The tariffs implemented in 2025 initially supported the dollar by slowing imports, but their broader economic effects—higher consumer prices and retaliation from trading partners—ultimately weighed on growth expectations and the currency.

Legal challenges to presidential tariff authority could reshape the landscape quickly. If the Supreme Court strikes down the administration's more controversial trade measures, analysts suggest "asset managers caught offside could be forced to cover, sparking a rally" in the dollar.

Conversely, escalating trade conflicts could accelerate dollar weakness by undermining investor confidence in U.S. economic governance.

Technical Outlook: Range-Bound With Downside Risk

From a technical perspective, currency strategists see the dollar trading in a range between 97 and 101 during the first quarter of 2026. The index briefly touched 100 in recent sessions before sellers emerged, suggesting overhead resistance remains significant.

Key levels to watch:

  • Support: 97.00-97.60 zone, representing the lower end of the expected range
  • Resistance: 100.00 psychological level and the 101 zone
  • Year-end forecasts: Most strategists cluster between 92 and 98, with bias toward the lower end

Global Context

The dollar's 2025 decline came amid surprisingly strong performance from other major currencies. The euro benefited from stabilizing economic conditions in Europe, while the British pound rallied on reduced Brexit uncertainty. Even the Japanese yen, which struggled against the dollar for years, found support from shifting rate differentials.

For 2026, currency strategists suggest the dollar's fate will hinge on relative economic performance, central bank policy divergence, and the resolution of policy uncertainties unique to the United States—particularly around trade and Fed governance.

What It Means for Investors

A weaker dollar generally benefits U.S. multinationals by making their overseas earnings more valuable when translated back to dollars. It also supports commodity prices and can boost emerging market assets. However, for American consumers and travelers, a weaker currency means reduced purchasing power abroad and potentially higher import prices.

Investors with significant international exposure may want to consider their currency hedging strategies as the dollar's 2026 trajectory remains highly uncertain. The recovery attempt is real, but the headwinds that drove last year's decline haven't fully dissipated.