Wall Street institutions including Deutsche Bank AG (DB) and Goldman Sachs Group Inc. (GS) forecast that the U.S. dollar (DX=F) will resume its downward trajectory next year as the Federal Reserve continues to cut interest rates.
In the first half of this year, the dollar experienced its steepest decline since the early 1970s, driven by global market turbulence from former President Trump’s trade wars. Over the past six months, however, the currency has stabilized.
Strategists now anticipate renewed weakness in 2026, as the Fed maintains its accommodative monetary policy while other major central banks hold rates steady or gradually shift toward tightening. This divergence is expected to prompt investors to sell U.S. Treasuries in favor of higher-yielding assets abroad.
More than six major investment banks broadly agree that the dollar will depreciate against key currencies such as the yen, euro, and pound. A Bloomberg consensus forecast projects a roughly 3% decline in a widely tracked dollar index by the end of 2026.
“There’s ample room for markets to price in a deeper rate-cutting cycle,” said David Adams, head of G10 FX strategy at Morgan Stanley, which expects a 5% drop in the dollar in the first half of the year. “This leaves plenty of room for further dollar weakness.”
The anticipated decline is expected to be more moderate and less broad-based than this year’s selloff, which saw the dollar weaken against all major currencies, pushing the Bloomberg Dollar Spot Index down nearly 8%—its worst annual performance since 2017. The outlook also hinges on expectations of persistent U.S. labor market softness, though uncertainty remains given the post-pandemic economy’s surprising resilience.
Currency forecasting remains notoriously difficult. At the end of last year, investors piled into the so-called “Trump trade,” betting his policies would spur growth and drive dollar strength. Back then, strategists had predicted a reversal by mid-2025 but were caught off guard by the scale of the dollar’s first-half plunge.
Still, analysts believe the broader dynamics in the new year will weigh on the greenback. Traders are pricing in two additional 25-basis-point Fed rate cuts next year, and regardless of who replaces Jerome Powell as Fed chair, the nominee may face White House pressure to ease further. Meanwhile, the European Central Bank is expected to hold rates steady, while the Bank of Japan may hike modestly.
“We see more downside than upside risks for the dollar,” said Luis Oganes, head of global macro research at JPMorgan Chase & Co. in London, during a Tuesday briefing.
A weaker dollar would ripple through the broader economy: import costs would rise, the value of overseas corporate earnings would increase, and exports would get a boost—likely welcome news for a Trump administration that has long criticized the U.S. trade deficit. It could also extend the rally in emerging markets as investors chase higher yields.
This capital flow has already driven the best returns for emerging-market carry trades (borrowing in low-rate currencies to invest in higher-yielding assets) since 2009. Both JPMorgan and Bank of America see further upside for EM currencies, with the former favoring the Brazilian real and the latter bullish on the Korean won and Chinese yuan.
This month, a Goldman Sachs team led by Kamakshya Trivedi noted that improving economic data in multiple countries has led markets to revise growth expectations upward for other G10 currencies like the Canadian and Australian dollars. They added, “The dollar tends to weaken when the rest of the world is doing well.”
However, some contrarians argue the dollar could strengthen against select majors, citing U.S. economic outperformance. Analysts at Citigroup Inc. and Standard Chartered Plc suggest that AI-driven growth will attract investment inflows, buoying the dollar.
“We believe 2026 could mark the start of a cyclical rebound for the dollar,” wrote a Citigroup team led by Daniel Tobon in their annual outlook.
The Fed’s policymakers on Wednesday raised their 2026 growth forecast, underscoring potential upside surprises. Still, the central bank cut rates by 25 basis points and signaled one more reduction next year. Powell also dismissed concerns about a policy pivot toward hikes, stating the debate now centers on whether to keep easing amid soft labor data and still-elevated inflation.
His remarks eased market jitters after some traders feared a more hawkish stance. The Bloomberg Dollar Index fell 0.7% over Wednesday and Thursday—its worst two-day drop since mid-September—as Treasury yields declined and traders adjusted positions for renewed Fed easing.
Late last month, Deutsche Bank’s global head of FX research, George Saravelos, and New York-based strategist Tim Baker noted in their annual outlook that the dollar had benefited from “exceptionally resilient” U.S. growth and equity gains. But they argued the currency is now overvalued and projected underperformance in 2026 as global growth and stock returns rebound elsewhere.
“If these forecasts materialize, they would mark the end of an unusually prolonged dollar bull cycle this decade,” they wrote.
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