By Chuck Mikolajczak NEW YORK, Jan 2 (Reuters) – The U.S. dollar began 2026 stronger on Friday, snapping last year’s slump against most currencies as investors look ahead to a critical week of economic data that could steer Federal Reserve policy and global markets. The rebound follows the sharpest annual decline since 2017 of more than 9%, driven by narrowing interest-rate gaps with other economies and persistent worries over U.S. fiscal health, a global trade war and Fed independence — risks that remain in play this year. Next week’s data deluge, capped by next Friday’s payrolls report, is expected to offer clues on whether the Fed will cut rates further, with markets already pricing in two reductions versus one projected by a divided central bank. "It's going to be a time to actually do a lot of assessment, we won't have the Fed meeting until the end of the month, but there's no consensus," said Juan Perez, director of trading at Monex USA in Washington. "This past U.S. government shutdown was unprecedented and inconceivably long, so it really affected the way that data has been taken, has been interpreted, and has been able to really be gauged or taken as fully accurate." Markets in Japan and China were closed on Friday, leading to thin trading volume. The dollar index, which measures the greenback against a basket of currencies, rose 0.24% to 98.48, with the euro down 0.25% at $1.1716. Euro zone manufacturing activity fell in December to its weakest in nine months, a survey showed. The currency surged more than 13% last year, its biggest annual rise since 2017. Sterling weakened 0.18% to $1.3445 following a 7.7% increase in 2025, also its biggest yearly jump since 2017. Investors will also be eyeing whom U.S. President Donald Trump chooses to be the next Fed chair as the term of current head Jerome Powell ends in May. Trump said that he would make his Fed chair pick this month, and many market participants expect Trump's pick to be a proponent of more rate cuts, as the president has repeatedly criticized Powell and the Fed for not reducing borrowing costs at a faster pace and a larger magnitude. Traders are fully pricing in two cuts this year compared to one projected by a currently divided Fed board. "We expect that concerns around central bank independence will extend into 2026, and see the upcoming change in Fed leadership as one of several reasons why risks around our Fed funds rate forecast skew dovish," Goldman strategists said in a note to clients. YEN REMAINS THE EXCEPTION The Japanese yen weakened 0.16% against the greenback to 156.91 per dollar after rising less than 1% against the greenback in 2025. It remained close to a 10-month low of 157.89 touched in November that drew policymaker attention and raised expectations for a possible intervention by the Bank of Japan. The BOJ hiked interest rates twice last year but that did little to support the yen performance as investors appeared to be looking for a more aggressive pace. Markets are not pricing in more than a 50% chance of another BOJ rate hike until July, according to LSEG data. In cryptocurrencies, bitcoin gained 1.64% to $89,741.61. (Reporting by Chuck Mikolajczak; additional reporting by Ankur Banerjee in Singapore and Samuel Indyk in London; Editing by Philippa Fletcher, Gareth Jones, Franklin Paul and Howard Goller)
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