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As we transitioned into the new year, the narrative for 2026 is that the dollar will continue to soften amid the myriad of same factors that played out in 2025. But for the time being, geopolitical tensions are taking center stage with the situation in Venezuela in particular. And that seems to be helping the dollar somewhat as we get things going this week.It’s still early on of course but the early flows are dollar positive with EUR/USD slipping back under 1.1700 and USD/JPY nudging up above the 157.00 mark currently.The latter will continue to be one of the more interesting ones with Japan continuing to have to tussle between a prime minister that wants to push a more expansionary fiscal agenda and a central bank that is trying to raise interest rates. At the balance, the path of least resistance still seems to be for the Japanese yen to weaken – at least for now.Going back to EUR/USD, the drop continues with a rejection of 1.1800 from the later stages of December trading. The 100-day moving average at 1.1663 will be a key support point to be mindful of this week, as the near-term bias holds more bearish currently.Looking at the macro picture though, the dollar will continue to face sustained headwinds in the first half of this year. The backdrop of de-dollarisation flows, fiscal concerns, policy incoherence, Fed rate cuts, and eventually political risks ahead of the midterm elections will be key drivers in impacting the greenback during the course of the year.As such, any positive flows from geopolitical tensions – which are at best temporary – will remain questionable in terms of arguing for a stronger standing for the currency. So, just keep that in mind.However, that is not to say that other major currencies are without their own struggles.The euro has to contend with a flailing economy and stagflation pressures, particularly in Germany, as well as France’s political dissonance. Meanwhile, the UK has a deepening cost of living crisis as well as fiscal concerns to deal with too. The latter might be put off slightly after the autumn budget but it definitely won’t be going away any time soon.Then, you have Japan which is suffering from fiscal/debt issues as well alongside a battle between the government and the BOJ on the interest rate path.So, this year looks to be one that will be a case of who has the cleanest shirt among the dirty laundry.
This article was written by Justin Low at investinglive.com.
💡 DMK Insight
Geopolitical tensions, especially in Venezuela, could impact the dollar’s strength in 2026. Traders should keep an eye on how these tensions evolve, as they often lead to volatility in forex markets. If the situation escalates, we might see a flight to safety, pushing investors toward assets like gold or the Swiss franc. This could further weaken the dollar, which has already been on a downward trend. Monitoring key economic indicators, such as U.S. inflation rates and interest rate decisions from the Fed, will be crucial. These factors will dictate how aggressively the dollar might soften in the coming months. On the flip side, if geopolitical tensions ease, we could see a rebound in the dollar as risk appetite returns. So, watch for any news from Venezuela and how it correlates with U.S. economic data. Keeping an eye on the DXY index could provide insights into dollar strength against a basket of currencies, particularly if it approaches significant support or resistance levels.
📮 Takeaway
Watch the DXY index closely; geopolitical developments in Venezuela could signal further dollar weakness or a potential rebound based on market sentiment.
