We entered 2026 expecting expensive valuations and Fed easing, alongside an administration increasingly focused on limiting the cost of financing a deteriorating fiscal position. Together, these conditions were expected to gradually normalise the USD.
Key Takeaways
- The September Fed hike closes, for now, the window for broad-based USD weakness. This window is likely to reopen if, as we expect, the Fed delivers less tightening than markets currently price. A genuine tightening cycle is the key risk to our view.
- Our structural concerns about the USD lie in the interaction between US fiscal sustainability, the price of capital and the opportunity set outside US assets, not a loss of reserve-currency status: reserve data show little evidence of a shift away from the dollar.
- Carry remains attractive while volatility stays contained, with AUD and NOK among our preferred G10 expressions and selected high-yielding EM currencies also offering opportunities.
The September Fed hike challenges the timing of that view. As the curve flattens and uncertainty around the terminal rate of this cycle rises, the window for broad-based USD weakness appears to be closing. In the near term, carry and relative value matter more than outright USD weakness. A renewed broad decline in the dollar would likely require inflation, and ultimately the Fed, to turn first. As we expect the Fed to deliver less than the market currently prices, we think any renewed dollar strength should be limited, and we would ultimately expect USD weakness to resume further down the road.
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