The USD to LKR exchange rate has recently reached 90-day highs near 309.2, which is 1.5% above its 3-month average of 304.7, displaying stability within a limited range of 2.6% from 301.3 to 309.2. Analysts attribute this rise largely to the softening of the US dollar, driven by expectations of aggressive interest rate cuts by the Federal Reserve in the upcoming years. The Fed’s dovish stance has resulted in weakened demand for the dollar, exacerbated by mixed economic data signaling a slowdown. Recent jobless claims hitting a three-month peak and a cooling manufacturing sector have further contributed to this outlook.
Moreover, markets are pricing in multiple rate cuts starting as early as March to June of 2026, which continues to put downward pressure on the USD. As economist forecasts indicate, the narrowing interest-rate differentials due to Fed policy are expected to diminish the USD’s yield advantage, making it less attractive to global investors. This sentiment is supported by a general shift towards risk-on assets, such as equities, which inversely impacts the dollar's strength.
In contrast, currency movements for the Sri Lankan rupee are affected by internal economic reforms and policy decisions. The Central Bank of Sri Lanka recently maintained its key interest rate at 7.75%, a move seen as essential for facilitating the approval of a national budget designed to meet IMF requirements. With a significant current account surplus reported, the local economy is still grappling with a depreciation of about 4.1% against the USD for the year, which raises concerns about rising import costs.
Economists note that despite the CBSL's accommodative measures intended to rein in inflation, there exist potential risks associated with currency stabilization and external pressures. Analysts suggest that the upcoming economic reforms may help to attract foreign investment and stabilize the LKR in the medium term, but the risks remain palpable, especially in light of global market dynamics affecting the USD.
Overall, with the USD under pressure from dovish Fed expectations and the LKR navigating through a reformative phase, exchange rate forecasts indicate a potential range-bound movement for USD to LKR, dictated by ongoing domestic financing needs in Sri Lanka and shifting market sentiments towards the USD. Monitoring key upcoming economic indicators, such as U.S. inflation prints and geopolitical developments, will be critical for understanding the trajectory of this currency pair.
