Why investors are cutting exposure to the dollar
According to currency strategists at major financial institutions, the dollar is likely to weaken further next year as monetary-policy divergence becomes more pronounced. While the US is reducing borrowing costs, other economies are offering higher yields, encouraging investors to sell US bonds and reallocate capital toward markets with more attractive interest-rate differentials.
Bloomberg’s consensus forecast suggests that the US dollar index could fall by around 3% by the end of 2026.
“Markets are still underestimating how deep the US rate-cut cycle could be. That leaves significant room for further dollar weakness,” said David Adams, Head of FX Strategy at Morgan Stanley.
Morgan Stanley itself takes an even more cautious view, projecting a roughly 5% decline in the dollar during the first half of 2026.
Politics and the Trump factor
Political considerations may add to the pressure on the US currency. Investors increasingly expect that Donald Trump could push the Federal Reserve toward faster and deeper rate cuts. Historically, Trump’s administration has favored a weaker dollar, seeing it as supportive for US exporters and helpful in narrowing the country’s trade deficit.
Markets are already pricing in two 25-basis-point rate cuts next year. Recent comments from Fed Chair Jerome Powell, who noted that policymakers are debating whether to “cut or pause” rather than hike, briefly calmed markets but also reinforced downside pressure on the dollar.
An opposing view: who still believes in the dollar
Despite the broadly bearish consensus, not all analysts share a negative outlook. Citigroup and Standard Chartered argue that the strength of the US economy—driven in part by rapid advances in artificial intelligence—will continue to attract global investment flows.
“We see scope for a cyclical recovery in the dollar during 2026,” Citigroup’s analysts said in their annual outlook.
According to the bank, technological innovation and resilient economic growth could ultimately outweigh the impact of lower interest rates and provide renewed support for the US currency.