Deutsche Bank and Goldman Sachs expect further dollar weakness

Today 5:30 p.m

Deutsche Bank AG, Goldman Sachs Group Inc. and other Wall Street banks predict the U.S. dollar will continue its decline next year as the Federal Reserve continues its tapering interest rate.

The currency has stabilized over the past six months after suffering its sharpest decline in the first half of the year since the early 1970s, as President Donald Trump’s trade war wreaked havoc in the United States. global markets.

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However, strategists expect the greenback to weaken again in 2026 as the Federal Reserve continues to ease monetary policy while others stick with their rate hikes or are close to raising rates. This divergence would give investors an incentive to do so Sell ​​debt Americans and move the cash to countries where payments are higher.

As a result, forecasters at more than half a dozen major investment banks largely expect the dollar to fall against major currencies such as the yen, euro and pound. The dollar is a widely followed index, according to Bloomberg consensus estimates will become weaker 3% by the end of 2026.

“There is plenty of room for markets to price in a deeper rate cutting cycle,” he said. David AdamsHead of G10 currency strategy at Morgan Stanley, who expects the dollar to fall 5% in the first half of the year. “That leaves a lot of capacity for one greater weakness of the dollar.”

The dollar’s decline is expected to be more modest and not as widespread as the decline this year, when it lost ground against all major currencies and sent the Bloomberg Dollar Spot Index down nearly 8%. Biggest decline annually since 2017. And the outlook depends on the expectation that the U.S. labor market will continue to weaken – uncertain given the surprising resilience of the U.S. labor market Economy after the pandemic.

However, strategists see overall conditions as a recipe for a weaker dollar as the new year begins. Traders expect the Fed to make two more quarter-point interest rate cuts next year, and whoever Trump chooses to replace Chairman Jerome Powell will likely bow to pressure from the White House to cut rates further. Meanwhile, the European Central Bank is expected to keep interest rates stable, while the Bank of Japan increases it little by little.

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“We see the risks being more anti-dollar than pro-dollar,” he said. Luis OganesHead of global macro research at JP Morgan in London, during a press conference on Tuesday.

A weaker dollar would have knock-on effects on the overall economy, making imports more expensive, increasing the value of corporate profits abroad, and much more Boost exports — something that would likely be welcomed by a Trump administration that has complained about the U.S. trade deficit. There could also be an extension of rallies in emerging markets as investors shift cash to take advantage of higher interest rates.

The move increased the full potential of emerging market carry trades, which involve borrowing in countries with low interest rates and investing where returns are higher. higher returns since 2009. JP Morgan and Bank of America Corp. see potential for additional gains and highlight the Brazilian real and a group of them Asian coins.

At Goldman Sachs, analysts led by Kamakshya Trivedi noted this month that the market is beginning to adopt a more optimistic economic outlook for other G10 currencies such as Canada and Australia following better-than-expected data. They pointed out that “Dollar trend to devalue when the rest of the world is doing well.”

Opponents who expect the dollar to strengthen against some other major currencies point primarily to the robust US economy. This growth, fueled by the rise of artificial intelligence, will attract investment flows into the country that will increase this Dollar valuesaid analysts at Citigroup Inc. and Standard Chartered.

“We see great potential for a recovery in the dollar cycle in 2026,” said the Citigroup team led by Daniel Tobon.

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The possibility of stronger-than-expected growth was underscored on Wednesday when Fed board members upgraded their 2026 forecasts. Still, they cut the key interest rate by a quarter point and maintained another cut for next year. Powell also allayed any concerns that the Fed could raise interest rates again, saying the debate was now over whether to proceed. Lower them – or wait– as they struggle between a weakened labor market and inflation that remains above target.

His comments were met with relief in markets as some traders feared a more hawkish message. As Treasury yields fell, the Bloomberg Dollar Index fell 0.7% between Wednesday and Thursday Biggest decline of two days since mid-September as traders prepared for the Fed to resume its rate-cutting cycle.

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