Major investment banks anticipate the greenback will weaken as Federal Reserve rate cuts widen the gap with other central banks holding steady or hiking.
Major investment banks anticipate the greenback will weaken as Federal Reserve rate cuts widen the gap with other central banks holding steady or hiking.
The American dollar enjoyed a brief reprieve from its historic tumble, but Wall Street’s biggest players believe the calm won’t last. Deutsche Bank, Goldman Sachs and a growing roster of major financial institutions are forecasting that the greenback will resume its downward trajectory throughout 2026 as the Federal Reserve continues trimming interest rates while other central banks pump the brakes or reverse course entirely.
The currency found its footing over the past six months after experiencing its steepest decline since the early 1970s. That earlier plunge came during the first half of this year when President Donald Trump’s aggressive trade policies sent shockwaves through international markets. Yet strategists warn that this stabilization represents only a temporary pause rather than a fundamental reversal of fortunes.
Interest rate divergence fuels dollar pessimism
The rationale behind the bearish dollar forecasts centers on an emerging split in monetary policy across major economies. As the Federal Reserve continues easing its stance by lowering rates, other central banks appear poised to maintain current levels or even tighten. This divergence creates a compelling incentive for investors to abandon American debt instruments in favor of foreign assets offering superior returns.
More than half a dozen prominent investment banks have aligned their predictions around this theme, with consensus estimates suggesting the dollar will surrender roughly 3% of its value against major trading partners by late 2026. Morgan Stanley projects an even steeper 5% decline during the first six months of the year, arguing that markets have yet to fully account for how deep the Fed’s cutting cycle might extend.
The anticipated weakness should prove less dramatic than this year’s performance, when the dollar lost ground against every major currency and pushed a widely tracked Bloomberg index down nearly 8% in its sharpest annual retreat since 2017. However, these projections depend heavily on assumptions about American employment trends, which remain difficult to predict given the economy’s unexpected resilience following the pandemic disruption.
Forecasting currencies proves treacherous
Currency predictions carry notorious difficulty, as recent history demonstrates. When the dollar surged late last year amid enthusiasm over Trump’s economic agenda, strategists confidently predicted a reversal by mid 2025. Instead, they found themselves blindsided by the magnitude of the drop that materialized during the first half of this year.
Nevertheless, the fundamental dynamics heading into the new year appear structured to favor dollar weakness. Market pricing currently reflects expectations for two additional quarter point Fed rate reductions in 2026, with speculation that Trump’s eventual replacement for Chair Jerome Powell might prove even more accommodating to White House pressure for lower rates. Meanwhile, the European Central Bank looks likely to maintain its current position while the Bank of Japan gradually pushes rates higher.
Economic ripples from a cheaper dollar
A diminished dollar would trigger cascading effects throughout the broader economy. Import costs would rise for American consumers, while corporations would see their overseas profits grow more valuable when converted back to dollars. Export competitiveness would improve, likely pleasing a Trump administration that has consistently criticized America’s trade imbalance.
The shift would also benefit emerging markets as investors redirect capital toward countries offering more attractive interest rates. This dynamic has already powered emerging market carry trades to their strongest returns since 2009, with both JPMorgan and Bank of America identifying additional opportunities in currencies like the Brazilian real, South Korean won and Chinese yuan.
Goldman Sachs analysts noted this month that markets have begun incorporating more optimistic economic expectations into other developed nation currencies, including the Canadian and Australian dollars, following surprisingly strong data releases. They highlighted the dollar’s historical tendency to weaken when global economic conditions improve.
Contrarian voices cite American economic strength
Not everyone shares the pessimistic dollar outlook. Analysts at Citigroup and Standard Chartered argue that America’s robust economic performance, turbocharged by artificial intelligence investments, will continue attracting capital flows that support the currency. The Citigroup team explicitly anticipates a dollar cycle recovery taking shape during 2026.
Wednesday’s Federal Reserve meeting underscored this tension when policymakers raised their growth projections for next year while simultaneously cutting rates by a quarter point and signaling at least one additional reduction ahead. Powell dismissed concerns about potential rate increases, framing the debate as whether to continue cutting or pause while balancing a softening job market against inflation that remains above target.
His measured comments reassured traders who had braced for a more aggressive stance. Treasury yields dropped and the Bloomberg dollar index slid 0.7% over Wednesday and Thursday, marking its largest two day decline since mid September.
Deutsche Bank’s global foreign exchange research team acknowledged that the dollar has benefited from remarkably strong economic performance and soaring stock prices, yet they maintain the currency sits overvalued. They predict declines against major counterparts as growth and equity returns accelerate elsewhere, potentially confirming that this decade’s unusually extended dollar bull cycle has finally ended.