Analysis-Dire year for dollar has little light at end of tunnel in 2026

Core Viewpoint - The U.S. dollar is expected to continue its decline in 2024, despite signs of stabilization at the end of 2023, driven by global growth and further easing by the Federal Reserve [1][3]. Currency Performance - The U.S. dollar has decreased by 9% this year against a basket of currencies, marking its worst performance in eight years due to anticipated Federal Reserve rate cuts and concerns over U.S. fiscal deficits [2]. - The dollar index has rebounded nearly 2% from its September low, but forecasts for a weaker dollar in 2026 remain unchanged among FX strategists [6]. Interest Rates and Monetary Policy - Investors expect the dollar to weaken further as other major central banks maintain or tighten their policies, while a new Fed Chair is anticipated to adopt a more dovish stance [3]. - Lower U.S. interest rates typically reduce the attractiveness of dollar-denominated assets, leading to decreased demand for the currency [3]. Valuation Insights - The U.S. dollar is considered overvalued from a fundamental perspective, with a real broad effective exchange rate of 108.7 in October, only slightly down from a record high of 115.1 in January [4][7]. Global Economic Context - Expectations for dollar weakness are linked to converging global growth rates, with other major economies expected to gain momentum and narrow the U.S. growth premium that has supported the dollar [8][9]. - Fiscal stimulus in Germany, policy support in China, and improved growth in the euro zone are anticipated to contribute to this shift [9].