US Dollar Price Annual Forecast: Will 2026 be a Year of Transition?

Geopolitical and Economic Context - Geopolitical tensions, including issues in the Middle East, the Ukraine war, and US-China trade relations, have created a constant background hum affecting market stability [1][22] - Inflation remains a significant concern, with headline pressures easing but uneven progress, particularly in services, leading to ongoing debates about the necessary restrictiveness of monetary policy [2][11] US Economic Resilience - The US economy has shown unexpected resilience, with growth holding up, inflation cooling slowly, and a tight labor market keeping the Federal Reserve cautious about policy changes [3][12] - The upcoming end of Fed Chair Jerome Powell's term in May introduces uncertainty regarding future monetary policy direction, with potential implications for the US Dollar [4][30] Dollar Outlook and Market Dynamics - The US Dollar is expected to gradually soften in the coming years, driven by narrowing interest-rate differentials and less asymmetric global growth, although aggressive rate cuts by the Fed are not anticipated [6][29] - The current market environment is characterized as a transition phase for the US Dollar, with conditions for broad-based appreciation beginning to erode but not collapsing [7][36] Fiscal Policy and Political Environment - US fiscal policy, marked by large deficits and rising debt issuance, complicates the Dollar outlook, as expansive fiscal measures support growth while increasing concerns about debt sustainability [14][15] - Political dynamics, particularly surrounding election years, tend to increase volatility in FX markets, as seen in recent government shutdowns [16][30] Valuation and Positioning - The US Dollar is currently not considered cheap, but speculative positioning indicates a significant number of market participants are already positioned for further Dollar weakness, which alters the risk profile [17][18] - A rich valuation combined with heavy short positioning suggests that a clean Dollar bear market is less likely, with potential for choppy trading and counter-trend moves [20][36] Currency Pair Outlook - The Euro is expected to find support as cyclical conditions improve, but structural challenges remain [24] - The Japanese Yen may benefit from Japan's gradual policy shift, though volatility is anticipated [25] - The Pound Sterling faces a tough backdrop with weak growth and limited fiscal flexibility [26] - The Chinese Renminbi is under depreciation pressure, but authorities are likely to manage it to avoid sharp moves [27] - Commodity currencies like the Australian Dollar and Canadian Dollar may benefit from improved risk sentiment and stable commodity prices, though gains will be uneven [28] Scenarios for 2026 - The base case predicts a gradual loss of ground for the Dollar, while a more bullish scenario could arise from stickier inflation or geopolitical shocks [29][30] - A bearish scenario is less likely and would require a clearer global growth recovery and decisive Fed easing [30][31] Technical Analysis - The technical outlook for the Dollar suggests a range-bound movement rather than a decisive trend reversal, with key levels to watch for potential breaks [32][33] - The Dollar's recent pullback is viewed as a pause within a broader range, indicating that any downside is unlikely to be smooth or uncontested [34][36]