Several major Wall Street institutions have signaled expectations for a renewed US dollar decline in 2026 as the Federal Reserve continues its easing cycle. David Adams, head of G10 FX strategy at Morgan Stanley, projects a 5% depreciation in the first half of next year.
Wall Street's dollar pessimism Deutsche Bank, Morgan Stanley, and Goldman Sachs among others forecast the greenback's resurgence as a downward trend next year. While the currency stabilized over the past six months after its steepest H1 2025 plunge since the 1970s (triggered by Trump-era trade wars), strategists anticipate renewed weakness.
The divergence in monetary policies—with the Fed continuing cuts while other major central banks hold or hike rates—is expected to drive capital outflows from US bonds toward higher-yielding markets. Consensus among investment banks suggests broad-based dollar declines against the yen, euro, and pound, with Bloomberg's median forecast indicating a 3% drop in the DXY index by end-2026.
"Markets have ample room to price in a deeper cutting cycle," noted Morgan Stanley's Adams, emphasizing additional downside potential. However, the 2026 depreciation is expected to be more moderate than 2025's 8% Bloomberg Dollar Spot Index slump—the worst annual performance since 2017. This outlook hinges on persistent US labor market softness, though post-pandemic economic resilience leaves uncertainty.
Currency forecasting remains fraught with challenges. Last year's "Trump trade" inflows—betting on growth-boosting policies—defied strategists' expectations for a mid-2025 dollar reversal. Now, traders price in two more 25bp Fed cuts next year, with potential political pressure for further easing under a new Fed chair appointed by Trump. Meanwhile, the ECB is expected to hold rates while the BOJ implements modest hikes.
Emerging markets poised to benefit JPMorgan's global macro head Luis Oganes highlights mounting downside risks for the dollar. A weaker greenback would have mixed US economic effects: boosting export competitiveness and overseas earnings (potentially welcomed by the Trump administration) while raising import costs. It may also extend EM rallies as investors chase higher yields.
EM carry trades have delivered their best returns since 2009, with JPMorgan and Bank of America seeing further potential in Brazil's real and Asian currencies like the won and yuan. Goldman Sachs notes improving sentiment toward commodity-linked G10 currencies (CAD, AUD) amid strong data, citing the dollar's historical tendency to weaken during global growth periods.
Deutsche Bank's George Saravelos argues the dollar remains overvalued despite benefiting from US economic resilience and equity gains. He predicts underperformance against majors as global growth rebalances, potentially ending the post-2020 dollar bull market. Dissenting voices like Citi and Standard Chartered point to AI-driven US strength sustaining capital inflows, with Citi's team asserting "strong 2026 dollar recovery potential."
The Fed's latest 25bp cut while upgrading 2026 growth forecasts underscores this tension. Chair Powell ruled out near-term hikes but left open whether to continue easing amid soft employment and elevated inflation. His dovish tone triggered a 0.7% two-day DXY drop—the steepest since September—as yields fell.
"Additional H1 2026 cuts appear likely," said Indosuez Wealth Management CIO Alexandre Drabowicz. "The May Fed leadership transition under Trump could cement a dovish bias, keeping us cautious on the dollar outlook."
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