Markets Enter 2026 With Weaker Dollar (5 - 9 January)

Global markets entered 2026 with the US dollar extending its sharpest annual decline in eight years, pressured by a shrinking yield advantage and uncertainty surrounding the new administration’s tariff agenda.

Despite the Fed’s single-cut projection for the year, traders are pricing in two rate reductions, fueled by FOMC minutes that signaled an openness to easing if inflation cooling persists.

In the commodities space, precious metals maintained their historic momentum. Gold and silver started the year building on their strongest annual performances in decades, driven by a combination of geopolitical risk, central bank accumulation, and their status as critical hedges against trade-related volatility.

Market Drivers & Catalysts

• Dollar’s Structural Pressure: Following a 9% decline in 2025, the DXY remains near 98.2 as markets weigh fiscal deficits, central bank independence, and the upcoming nomination of a new Fed Chair.
• Precious Metals Super-Cycle: Gold is building on a 65% annual surge (its best in 40 years), while silver started 2026 above $74/oz after a record-breaking 148% gain in 2025.
• Geopolitical Energy Risks: Tighter US measures on Venezuelan oil and renewed attacks on Russian energy infrastructure are battling a projected global surplus of 3.8 million barrels per day.
• Japan’s Fiscal Strain: Prime Minister Takaichi’s record ¥122.3 trillion budget has pushed JGB yields near 2%, as the country balances massive spending with a debt-to-GDP ratio exceeding 200%.
• China’s Surprise Expansion: The official Manufacturing PMI unexpectedly climbed to 50.1 in December, marking the first expansion since March and signaling a potential bottoming out of domestic demand.

Fixed Income

• United States 10‑Year Treasury: The 10‑year yield hovered near 4.2% at the start of the year. Investors are dissecting December payroll expectations and FOMC minutes that showed a split among officials regarding the timing of future easing from the current 3.5%–3.75% range.
• United Kingdom 10‑Year Gilt: The 10‑year yield slipped to 4.48%, a three-week low. Following the BoE's December cut to 3.75%, markets are pricing in at least one more reduction in early 2026 despite headline inflation remaining at 3.2%.
• Japan 10‑Year Government Bond: Yields hovered near 2%, capping a year where they rose nearly 90%. The BOJ’s policy rate sits at a 30-year high of 0.75%, with the market sensitive to further hikes as the government attempts to limit new bond issuance.
• Germany 10‑Year Bund: Yields started the year near 2.87% after a 50 bps rise in 2025. Markets anticipate heavy net supply in 2026 to fund fiscal stimulus, even as the ECB is expected to keep rates on a prolonged pause.

Commodities

Gold climbed to approximately $4,360/oz. Support remains strong due to central bank buying and ETF inflows, alongside FOMC signals that the door remains open for further rate cuts if macro conditions allow.

Silver jumped over 3% to nearly $74/oz. Following its strongest year on record (+148% in 2025), silver continues to benefit from its designation as a critical mineral and tight global inventories.

Currencies

• U.S. Dollar Index (DXY): The index slipped to 98.2. The "Trump Trade" and tariff uncertainty, combined with a potential shift to a more dovish Fed leadership, continue to erode the dollar’s yield advantage.
• Euro: EUR/USD eased toward $1.17 after a massive 13.5% rally in 2025. The ECB’s pause, supported by inflation near the 2% target and resilient growth, provides a steady contrast to US policy volatility.
• British Pound: GBP/USD hovered near $1.34. Sterling gained 7.5% against the dollar in 2025 but fell 5% against the euro, highlighting the pound’s struggle with weak domestic growth vs. European resilience.
• Japanese Yen: USD/JPY stabilized near 156.6. Despite ending a four-year losing streak in 2025 with a 0.3% gain, the yen remains near ten-month lows, keeping the market on high alert for Tokyo intervention.

Economic Data Highlights

• U.S. FOMC Meeting Minutes: Revealed that most members see scope for cuts in 2026 if inflation eases. The committee currently holds rates at 3.5%–3.75%, noting improved growth expectations despite early tariff impacts.
• U.S. Initial Jobless Claims: Fell by 16,000 to 199,000 (week ending Dec 27), the lowest since January, excluding Thanksgiving. Continuing claims decreased to 1.89 million, indicating labor market stability.
• China Manufacturing PMI (Dec): Rose to 50.1 (from 49.4), beating forecasts. Output and new orders improved, though employment remains a weak spot and input cost pressures persist.
• Japan’s 2026 Budget: Approved at a record ¥122.3 trillion. The plan focuses on balancing defense and social spending while attempting to control debt through limited new issuance.
• U.S. Federal Rate: Currently stands at 3.5%–3.75% following the third 25 bps cut of the recent cycle in December 2025.

Macro Calendar Highlights

• U.S. Non-Farm Payrolls (December)
• U.S. FOMC Meeting Minutes Release
• China Manufacturing & Non-Manufacturing PMI
• U.S. Weekly Export Sales Report
• Eurozone Sentiment and Inflation Updates