Several major Wall Street banks recently stated that the US dollar will resume its downward trend next year as the Federal Reserve continues its interest rate cut cycle. Morgan Stanley... David Adams, head of foreign exchange strategy at G10, said the bank expects the dollar to fall by 5% in the first half of next year.
Wall Street banks are bearish on the dollar.
According to Bloomberg, Deutsche Bank Morgan Stanley , Goldman Sachs Major Wall Street banks, including [names of banks], predict that the dollar will resume its downward trend next year. In the first half of this year, impacted by the trade war initiated by the Trump administration, the dollar suffered its deepest decline since the early 1970s, but has gradually stabilized over the past six months.
However, strategists expect the dollar to weaken again in 2026 as the Federal Reserve continues to ease monetary policy, while other major central banks keep interest rates stable or shift towards raising them. This policy divergence will prompt investors to sell U.S. bonds and move funds to countries with higher yields.
Therefore, several major investment banks Most forecasting agencies believe the dollar will weaken against major currencies such as the yen, euro, and pound. The median forecast compiled by Bloomberg shows a closely watched dollar index falling by about 3% by the end of 2026.
“The market has ample room to price in a deeper rate-cutting cycle,” said David Adams, head of G10 FX strategy at Morgan Stanley . The bank expects the dollar to fall by 5% in the first half of next year, which means there is still plenty of room for the dollar to weaken further.
However, the dollar's decline next year is expected to be more moderate and less widespread than this year. This year, the dollar has fallen against all major currencies. The Bloomberg Dollar Spot Index fell nearly 8% for the year, its largest annual drop since 2017. This outlook is based on expectations of continued weakness in the U.S. job market, but the prospects remain uncertain given the extraordinary resilience of the economy after the pandemic.
Currency forecasting is inherently challenging. At the end of last year, investors flocked to the so-called "Trump trade," betting that his policies would stimulate economic growth and drive the dollar sharply higher; strategists at the time predicted that the dollar's rally would reverse by mid-2025, but they did not anticipate the dollar's significant decline in the first half of the year.
Strategists believe the overall outlook for the new year will lead to a weaker dollar. Traders have already priced in two more 25-basis-point rate cuts by the Federal Reserve next year, and that whoever Trump nominates to succeed Powell as Fed chairman is likely to face pressure from the White House to cut rates further. Meanwhile, the European Central Bank is expected to keep interest rates unchanged, while the Bank of Japan is expected to raise rates slightly.
Funds may be transferred to emerging markets
Recently, JPMorgan Chase Luis Oganes, head of global macro research in London, said the dollar faces more downside risks than upside risks.
Bloomberg points out that a weaker dollar will have a ripple effect on the overall US economy: import costs will rise, the value of companies' overseas profits will increase, and exports will be boosted—which is likely to be welcomed by the Trump administration, which has been complaining about the US trade deficit. Furthermore, as investors shift funds to emerging markets to obtain higher interest rates, a weaker dollar could also prolong the upward trend in emerging markets.
This capital flow fueled the largest returns since 2009 for emerging market carry trades (borrowing funds from low-interest-rate countries and investing in high-yield markets). JPMorgan Chase and Bank of America... All believe that such transactions have further profit potential, and are optimistic about the Brazilian real as well as some Asian currencies such as the South Korean won and the Chinese yuan.
Goldman Sachs analysts Kamakshya Trivedi's team noted this month that the market is also beginning to price in a more optimistic economic outlook for other G10 currencies, such as the Canadian dollar and the Australian dollar, primarily benefiting from better-than-expected data. They pointed out that the US dollar has a tendency to perform well "when the global economy is strong." It has the characteristic of "tendency to depreciate".
In their annual outlook to clients at the end of last month, George Saravinos, global head of foreign exchange research at Deutsche Bank , and his New York colleague Tim Baker noted that the dollar has benefited from an “exceptionally resilient” economy and rising U.S. stock prices. However, they believe the dollar is overvalued and predict it will weaken against major currencies next year as growth accelerates and stock returns rise in other regions. “If these predictions come true, it will mean the end of the exceptionally long dollar bull market that has lasted since 2020,” they wrote.
However, a few institutions hold the opposite view. Citigroup Analysts at Standard Chartered Bank believe that artificial intelligence... The boom-driven U.S. economy remains strong and is expected to continue attracting international capital inflows, thus supporting the dollar's exchange rate. "We believe the dollar cycle recovery has strong potential in 2026," the Citi team wrote in their annual outlook.
On Wednesday, Federal Reserve policymakers raised their 2026 growth forecast for the United States, highlighting the prospect of stronger-than-expected growth. However, they still announced a 25-basis-point rate cut and maintained their forecast of another rate cut next year. Powell also allayed concerns that the Fed might shift to raising rates, stating that the current debate revolves around whether to continue cutting rates or pause further action given the weak labor market and inflation remaining above target.
Powell's comments eased market concerns after some traders had worried the Federal Reserve would send a more hawkish signal. As Treasury yields fell, the Bloomberg Dollar Index dropped 0.7% on Wednesday and Thursday, its biggest two-day decline since mid-September, when traders were positioning themselves for the Fed to resume its rate-cutting cycle.
Alexandre Drabowicz, chief investment officer at Indosuez Wealth Management, said, “We believe the Fed will cut rates again in the first half of next year. While predicting the second half is ‘too difficult,’ with Trump’s new Fed chair taking office in May, it’s safe to say that this will lean towards more rate cuts.” Drabowicz added, “In this environment, we remain cautious about the dollar.”
(Source: Securities Times)
