Foreign Exchange Commentary

Summary

• The U.S. Dollar Index (DXY) is trading near 99.13 due to geopolitical developments and U.S labor data
• Friday’s Non-Farm Payroll report was 50,000 added jobs with consensus having predicted 60,000
• The Danish krone is seeing selling pressure amidst U.S. tensions over Greenland
• The Chinese yuan is forecasted to be around the 6.85 range for the 1^st Quarter
• Euro-zone inflation data reports inflation at 2%, in-line with the ECB’s target inflation standards
• The Korean won extends its slide for the 7^th consecutive day
• Banxico’s meeting minutes revealed a more direct focus to combatting inflation which remains elevated
• The dollar-yen is trading at a one-year high after uncertainty over the next BoJ hike and Fed cut emerges

Big Picture: U.S. dollar rallies through the New Year

After a tumultuous 2025 that saw the U.S. dollar index dropping nearly 10%, the dollar began the new year a bit firmer due to mixed global data as well as shocking geopolitical developments such as the imprisonment of Nicolas Maduro, the current dictator of Venezuela, by the U.S - prompting a flight-to-safety. Though the situation is resolving, commodities remain elevated with gold trading above $4,500 per ounce and oil trading around $59 a barrel. Markets are also assessing the Trump administration’s comments on the annexation of Greenland. After White House deputy Chief of Staff, Sean Miller declared Greenland important for national security, Danish prime minister Mette Frederiksen responded proclaiming such a move as “the End of NATO.” This has resulted in selling pressure on the Danish krone, currently down almost 2% against the U.S. dollar since late December.

The U.S. dollar index (DXY) which compares the dollar to a basket of G10 currencies has seen a positive week, crossing above the 200-day moving average after 5 straight days of gains, currently at 99.13. Despite the U.S. dollar rally, Friday’s nonfarm payroll report was released with downward revisions for the two prior months and 10,000 less jobs than the consensus of 60,000 as predicted by market analysts. Despite the unemployment rate settling back down to 4.4% post government-shutdown, the overall hiring rate remains low and any pickups in the cooling of the labor market could be burdensome to the Federal Reserve (Fed) which continues to battle sticky inflation. With the University of Michigan sentiment index improving to 54 vs a 53.5 estimate, consumers are clearly more positive about the current state of the economy and cutting rates now could result in inflation returning. 

Despite the urges of the Trump administration to lower interest rates, 2026 is only expected to yield 2-3 cuts with the January 28th meeting pricing less than a 5% chance of movement, keeping the overnight rate at 3.75%. This suggests that despite the slowdown in jobs added, the Fed is taking a more wait-and-see approach after undergoing three 25 basis-point cuts in 2025 – the Supreme Court’s decision on the legality of tariff’s is still being conducted and could have adverse implications to the U.S. economy.

The euro currency has lagged against the U.S. dollar this week posting 7 straight days of losses and trading at its weakest levels since early December. After mixed U.S. data showed that the cooling labor market is still resilient, the reinforced expectations of limited rate cuts have sparked the U.S. dollar rally in tandem with flights-to-safety.

Looking at euro-zone data, headline inflation went down to 0.1% in December, posting a read of 2% - in line with the 2% inflation target set by the European Central Bank (ECB). Despite the efforts of the ECB, core-inflation remains above 2%, at 2.3% currently, which could result in tighter monetary policy. The euro currency has gained nearly 15% against the U.S. dollar since early 2025. Provided the Federal Reserve continues their rate cutting cycle, the euro is likely to appreciate versus the dollar in 2026 barring any catastrophic events that could trigger a flight-to-safety.

Across the channel, the Great British pound had the strongest yearly rally against the U.S. dollar since 2017 up over 7% since January 2025. Despite the positive momentum of the pound sterling, the U.K. is facing a slew of problems including but not limited to: stagnant growth, a cracking labor market, sticky inflation, and issues passing state budgets. For now, the Bank of England has one rate cut priced in for the year. 

The Mexican peso was one of the biggest winners against the U.S. dollar for the year, though there were several rounds of extreme volatility. The release of Banixco’s December minutes revealed continued uncertainty from the U.S. and acknowledged the ongoing threat of additional tariffs. The controversial decision to cut rates in December was met with skepticism as Mexico continues to battle high inflation (the most recent core inflation print was 4.3%). To combat this, Mexico is pushing for more local production of goods and services, levying tariffs of some 50% against China and other countries it doesn’t have free-trade agreements with.