The USD underperformed last year and softness is expected to extend into 2026, albeit in a more tactical and less linear fashion. A dovish-leaning Fed, reserve diversification, valuation concerns and higher US risk premia point to further downside, while policy uncertainty, a changing Fed leadership and volatile capital flows suggest greater noise and two-sided risks. Global investors remain committed to US assets, but lower rates should encourage increased hedging of USD exposure.
Macro risks remain finely balanced. Labour market and inflation dynamics will continue to guide a data-dependent Fed, with tail risks linked to growth, inflation persistence and the sustainability of the AI-driven investment cycle. The USD’s traditional safe-haven role is increasingly under scrutiny, raising the risk of a “broken smile” scenario.
Within G10, the EUR retains modest upside, GBP downside appears more limited, JPY remains constrained by low rates and domestic politics, and CHF strength is likely to be actively managed. In EM and LatAm, carry remains attractive but crowded positioning, rising political risk and volatility shocks could drive sharp reversals, leading to increasingly divergent FX outcomes.