Deutsche Bank’s estimates indicate that the U.S. dollar could decline by about 6% against a trade weighted basket of currencies by the end of 2026. Although the so called “Trump shock” effect on the dollar has subsided, current fundamentals continue to create a downward pressure environment on the currency, ranging from price valuations to the balance of payments and the monetary policy cycle. Together, these factors form a persistent scenario for a weaker dollar in the coming period.
The bank cites the growing U.S. current account deficit as a key factor supporting the currency’s decline, viewing it as a fundamental indicator of imbalances in international capital flows to the United States. However, the expected pace of decline is milder than previous 2025 estimates, reflecting a relative slowdown in downward momentum without eliminating it entirely.
Morgan Stanley expects that the current dollar rally is unsustainable and predicts that 2026 could be one of the most volatile years for the U.S. currency. Their scenario begins with a clear decline in the first half of the year, driven by the continuation of the Federal Reserve’s rate cutting cycle, followed by a partial recovery of the dollar as the central bank approaches the end of this cycle.
During this period, Morgan Stanley expects U.S. monetary policy to deliver three additional rate cuts before the end of H1, further lowering real yields in the United States, particularly amid continued labor market pressures. The bank believes that the Fed’s ongoing accommodative approach, even in the presence of some inflationary pressures, will prolong the broader dollar weakness.
The anticipated turning point comes in the second half of the year. As the rate cutting cycle ends and the U.S. economy enters a clearer improvement phase, the bank expects real yields to rebound due to better risk taking capacity, creating a so called “carry regime.” In this environment, higher yielding currencies become more attractive, traditional funding currencies weaken, while the dollar remains in a neutral position between the two.
On the euro side, Deutsche Bank expects the EUR/USD pair to reach around 1.25 by the end of 2026. This outlook is supported by improving European economic activity, global growth support, and the region’s strong external financial position. These pillars give the euro a relative advantage against the dollar, especially if the Fed continues its easing path while Europe moves into an economic upswing.
In Asia, the report notes that persistent inflation and a weak yen could prompt Japanese authorities to adopt tighter policies, even if initially reluctant. In China, the bank sees the yuan as undervalued, with a low inflation environment providing room for a real appreciation in the coming period, potentially reshaping currency market flows in favor of Asia.
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