History may not repeat itself exactly, but it often rhymes—and for the US dollar, which has just endured a sharp decline in 2025, the implications of historical data are unsettling: the pain may have only just begun.
According to quantitative analysis from Bank of America Merrill Lynch's global rates and currencies research team, significant sell-offs in the US dollar tend to occur in consecutive years. In 2025, the US Dollar Index (DXY) fell by 9.4% against G10 currencies, marking the second-largest annual decline in the past two decades. As 2026 begins, the most pressing question for investors is whether this downward trend will persist.
Strategist Howard Du and his team at Bank of America suggest that, if history is any guide, the answer is a definitive yes.
A historical backtest reveals that the US dollar typically experiences declines over two consecutive years. The Bank of America team examined data since 1975 to identify the historical years with the highest correlation to the dollar's performance in 2025. The results show that in four out of the top five most correlated historical analog years, the dollar continued to fall in the subsequent year.
The average correlation between these top five analog years and the dollar's price action in 2025 is remarkably high, at 81%.
In the second year of these analog periods, the dollar fell by an average of 8.3%. Even when expanding the scope to the top ten analog years, the probability of a dollar decline in the second year remains high at 70%, with an average drop of 5.5%.
This quantitative finding supports Bank of America's baseline foreign exchange view for 2026: that the dollar will weaken further against a backdrop of US/global interest rate convergence following Fed Chair Powell's tenure, stimulus measures in the Eurozone and China, and increased FX hedging of US dollar assets.
Among all the historical analog years (1987, 1995, 2003, 2007, and 2018), Bank of America considers 1995 to hold the most relevance for 2026.
The macroeconomic backdrop is similar: in 1995, technology-driven growth enabled the US economy to achieve a soft landing rather than a recession; despite inflation being near 3% instead of the 2% target, the Federal Reserve still proceeded with interest rate cuts in the second half of the year.
Looking ahead to 2026, Bank of America expects the US economy to "muddle through" after a weak Q4 2025 caused by a government shutdown, with the Fed implementing further rate cuts after mid-year.
Based solely on the price action following 1995, the model implies a 4.2% downside for the dollar in 2026. This aligns with Bank of America's forecast for the DXY to fall to around 95.
In contrast, the macroeconomic contexts of the other analog years differ significantly from the present. For instance, the Fed ultimately raised rates in both 1987 and 2018, which is not part of the current forecasts from Bank of America or the Fed; the years 1987, 2007, and 2018 all ended with market shocks, and while investors worry about an "AI bubble burst" as a tail risk for 2026, this is not the base-case scenario.
It is worth noting that the report highlights 2018 as the sole "exception" among the top five analog years, as the dollar reversed its 2017 decline and rallied by 4.7% that year.
However, Bank of America points out that replicating the 2018 reversal would require exceptionally stringent conditions.
The Federal Reserve would need to resume hiking interest rates, as it did in 2018.
A growth shock originating outside the US would be necessary. In 2018, major economies like the Eurozone and China experienced growth shocks, with Germany's economy contracting and US-China trade conflicts escalating.
Looking ahead to 2026, however, Bank of America's expectations are precisely the opposite: Eurozone growth is forecast to recover further, and growth prospects for Asia have been upgraded as US-China trade tensions ease. Consequently, the dollar lacks the fundamental support needed for a trend reversal.
Beyond interest rates and macroeconomic factors, equity market fund flows are also sending signals unfavorable to the dollar.
Although US stocks hit record highs at the start of 2026, their gains have lagged behind most global equity markets. Bank of America notes that as the global central bank easing cycle nears its end, the driving logic of the FX market is gradually shifting from the "pure rate-driven" dynamic of 2022-2024 to being "equity-driven."
Currently, the US dollar remains in a broad downtrend against G10 currencies. Bank of America emphasizes that if the trend of "global equities outperforming US stocks" observed in early 2026 persists, this cross-border divergence in equity performance will become a primary driver for shorting the dollar in 2026.
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