The U.S. dollar had a forgettable 2025. The Dollar Index (DXY) shed nearly 9.4% of its value—the worst annual performance since 2020—as the Federal Reserve cut rates and global investors sought opportunities elsewhere. But as 2026 begins, something is shifting.

The DXY surged to 98.89 on January 8, its highest level in a month, as investors aggressively recalibrated expectations for Fed policy. With markets now pricing in a 90% probability that the Fed will hold rates steady at its January meeting, the greenback is finding support that was absent throughout much of last year.

What's Driving the Dollar's Recovery

Several factors are converging to support the dollar after last year's selloff:

1. The Fed Pivot That Wasn't

Markets entered 2025 expecting aggressive rate cuts—some forecasters anticipated 150-200 basis points of easing. What they got was more modest: the Fed cut rates to a 3.5%-3.75% range, then signaled it was in no hurry to cut further.

With inflation still above the 2% target and the labor market showing resilience despite some cooling, the case for additional cuts has weakened. Bond futures now show just 16% odds of a cut at the January meeting, with meaningful easing not expected until later in 2026.

This "higher for longer" interest rate outlook supports the dollar by maintaining yield advantages over other major currencies.

2. European Economic Weakness

The euro, which makes up 57% of the DXY index, has struggled as Europe's economic outlook darkens. German industrial production continues to disappoint. French political instability has weighed on confidence. The European Central Bank, while also cutting rates, faces a worse growth backdrop that limits its currency's appeal.

3. Safe Haven Flows

Geopolitical uncertainty—from the Venezuela intervention to ongoing tensions with China—has triggered modest safe-haven flows into dollar-denominated assets. When global risks rise, the dollar typically benefits from its status as the world's reserve currency.

4. Technical Support

After testing support near 97.00 multiple times, the DXY has held its range. Technical analysts note that seller exhaustion at lower levels suggests underlying demand that could support further recovery.

"The dollar's decade-long rally may have paused in 2025, but it hasn't reversed. We're seeing the kind of consolidation that often precedes renewed strength."

— Currency strategist at a major investment bank

The Economic Data Behind the Move

Friday's jobs report illustrated the mixed economic picture that's supporting the Fed's patient approach:

  • Job creation: Just 50,000 positions added in December—well below expectations but not recessionary
  • Unemployment: Fell to 4.4% from 4.6%, beating expectations
  • Wages: Continue growing at a pace that supports consumer spending

The picture is one of gradual cooling rather than sharp deterioration—exactly the "soft landing" scenario the Fed has been targeting. It's not weak enough to force aggressive cuts, but not hot enough to require hikes. For the dollar, this Goldilocks scenario is supportive.

What This Means for Different Stakeholders

For International Investors

A stronger dollar cuts both ways for U.S.-based investors with international holdings. Foreign stock returns are diminished when translated back to dollars. European and emerging market equities, even if they perform well locally, may disappoint in dollar terms.

Conversely, foreign investors see their U.S. holdings appreciate in their home currencies. This can drive additional capital flows into dollar assets, potentially supporting both the currency and U.S. equity markets.

For Multinational Corporations

Dollar strength creates headwinds for U.S. companies with significant overseas revenue. When earnings from Europe or Asia are translated back to dollars, they're worth less. As earnings season kicks off this week, expect management teams to cite currency impacts on their results.

Tech giants like Apple, Microsoft, and Google generate substantial international revenue. Their guidance will be closely watched for signs of how dollar strength is affecting 2026 outlooks.

For American Travelers

After a year of expensive foreign trips, American tourists are getting some relief. A stronger dollar means more purchasing power in Europe, Japan, and other destinations. The euro, trading around $1.02, is near its weakest levels against the dollar in over a year.

For Commodity Prices

Most commodities are priced in dollars, so a stronger greenback typically pressures commodity prices. Gold, oil, and agricultural commodities all face headwinds when the dollar rallies. This relationship helps explain gold's recent consolidation after its strong 2025 performance.

The 2026 Outlook

Currency forecasting is notoriously difficult, but several scenarios are worth considering:

Base Case: Range-Bound Trading

Most forecasters expect the DXY to trade between 97 and 100 for much of 2026, with modest year-end weakness as Fed cuts eventually materialize. The International Monetary Fund expects improved global growth that could slightly weaken safe-haven demand.

Bull Case: Dollar Breakout

If U.S. economic data continues to surprise to the upside while Europe and China disappoint, the dollar could rally further. A DXY above 102-103 would signal renewed dollar dominance and create significant headwinds for emerging markets and commodities.

Bear Case: Dollar Selloff

If inflation cools faster than expected, the Fed could cut more aggressively than currently priced. Combined with improved global growth, this could push the DXY back toward 92-95—resuming the 2025 downtrend.

How to Position

For most individual investors, currency speculation should be a minor consideration. But currency exposure affects portfolio returns whether you actively manage it or not. Some considerations:

  • Review international allocations: With the dollar strengthening, international stocks face currency headwinds. This doesn't mean avoiding them, but being aware of the impact
  • Consider hedged options: Currency-hedged international ETFs remove forex volatility from returns, allowing investors to focus on underlying equity performance
  • Monitor emerging markets carefully: A strong dollar typically pressures emerging market currencies and assets. EM exposure should be sized appropriately
  • Recognize commodity impacts: Gold, oil, and other commodities may face pressure from dollar strength. Position sizes should reflect this dynamic

The Bottom Line

The dollar's quiet comeback may not grab headlines like cryptocurrency rallies or stock market records, but it matters for virtually every investor with a diversified portfolio. After bleeding value throughout 2025, the greenback is stabilizing—and potentially preparing for renewed strength.

The catalyst is straightforward: the Fed isn't cutting rates as aggressively as markets once expected, and the U.S. economy continues to outperform most developed-world peers. As long as these conditions persist, the dollar should find support.

For investors, the key is awareness. Currency movements don't require active trading to affect your returns—they do so automatically through the math of converting foreign assets to dollars. Understanding these dynamics helps explain why some investments perform differently than their underlying fundamentals might suggest.

The dollar's dominant role in global finance means its movements ripple through everything from commodity prices to corporate earnings to the cost of your next vacation. Its 2026 trajectory will be worth watching, even for those who never directly trade currencies.