Deutsche Bank, Goldman See Fed Cuts Rekindling Dollar’s Drop

Major Wall Street banks including Deutsche Bank, Goldman Sachs and Morgan Stanley forecast the US dollar will resume weakening in 2026 as the Federal Reserve moves to cut rates while the ECB holds and the Bank of Japan edges up policy, encouraging investors to shift cash out of US debt; Bloomberg’s consensus points to roughly a 3% decline in the dollar index by end-2026 (Morgan Stanley sees about a 5% drop in H1), after the Bloomberg Dollar Spot Index already fell nearly 8% this year. Traders price two quarter-point Fed cuts next year and Fed signals of easing — alongside the possibility of political pressure on Fed leadership — underpin the view, which would raise import costs, boost foreign-earned corporate profits and extend rallies in emerging-market currencies and carry trades (JPMorgan and BofA flag gains in the real, won and yuan). Contra calls from Citigroup and Standard Chartered note that stronger-than-expected US growth, driven by an AI-led investment cycle, could instead support a dollar recovery, leaving the outlook contingent on incoming macro data and the pace of Fed easing.

Analysis

Major Wall Street banks including Deutsche Bank, Goldman Sachs and Morgan Stanley project the US dollar will resume weakening in 2026 as the Federal Reserve eases while peers either hold or tighten policy; Bloomberg’s compiled consensus points to roughly a 3% decline in a widely tracked dollar index by end-2026, with Morgan Stanley forecasting about a 5% drop in H1. The dollar had already plunged earlier this year and the Bloomberg Dollar Spot Index is down nearly 8% for the year, though it stabilized over the past six months.

Market positioning reflects expectations for easier US policy: traders are pricing two additional quarter-point Fed cuts next year, the Fed recently cut by a quarter point and penciled in another, and strategists note potential political pressure on Fed leadership to cut further. That prospective rate divergence versus the ECB and Bank of Japan would incentivize capital outflows from US debt into higher-yielding markets, supporting further FX moves and extending emerging-market rallies and carry trades that have produced the biggest returns since 2009.

Material downside risk to the dollar is countered by uncertainty around US economic resilience and AI-driven investment: Citigroup and Standard Chartered argue stronger US growth could spur a dollar recovery, and Fed upside in 2026 projections underscores this risk. Given the forecasting difficulty, key alerts include US labor-market data, Fed guidance, and rate differentials across major central banks as primary triggers for directional FX moves.

Key Decisions for Investors

• Reduce tactical USD exposures relative to G-10 and select EM currencies (Brazilian real, South Korean won, Chinese yuan) in line with bank consensus for a 3%+ decline while sizing positions for potential 3-5% moves
• Reallocate a portion of fixed-income and cash allocations toward higher-yielding non‑US debt or FX carry opportunities noted by JPMorgan and BofA, but cap exposure and use stop-losses given downside scenario from renewed US strength
• Hedge import-cost and FX translation risk for multinational equity exposure through forwards or options, because a weaker dollar would raise import prices but boost overseas profits
• Monitor US labor-market prints, Fed communications and pricing of quarter-point cuts, and ECB/BoJ policy divergence as trigger points to trim or add USD positions, and keep hedges staggered to manage forecasting uncertainty