Outlook
The US dollar remains under pressure as a mix of fiscal deficits and looser monetary policy weigh on demand for USD assets. Trump’s threat to strike Iran and fears of a US government shutdown have kept risk premiums elevated, contributing to USD softness. A larger-than-expected rise in US jobless claims adds to the case for further near-term dollar weakness unless risk-off headlines spike sentiment. Markets expect the Fed to cut rates twice in 2026, bringing the policy rate to about 3.25%, which supports a softer dollar over the medium term. The dollar index has fallen roughly 10.4% since January 2025, underscoring the bias toward further USD softness unless headlines shift risk sentiment. A potential escalation in Iran or a surprise Fed Chair nomination could provoke swift, outsized moves in the dollar.
Key drivers
- USD remains pressured by fiscal deficits and a gradually looser monetary stance, plus political risk from Trump’s Iran stance and looming budget debates.
- A larger-than-expected rise in US jobless claims compounds USD downside by reinforcing a softer domestic growth signal.
- Policy expectations: markets anticipate two 25bp Fed cuts in 2026, to around 3.25%, keeping upside for the dollar limited unless risk-off conditions reappear.
- Geopolitical tensions (including actions in Venezuela and trade frictions with Canada) contribute to volatility and a preference for risk containment.
- The “Sell America” dynamic persists as investors reduce exposure to US assets amid policy and geopolitical uncertainties.
- Oil price moves: Oil/USD at 69.71, near 90-day highs, up about 10.5% versus the 3-month average of 63.1; oil strength can influence euro-area inflation expectations and risk sentiment, adding another layer of euro/dollar dynamics.
Range
USD/EUR: 0.8357 (3-month average 0.8567), range 0.8312-0.8711
USD/GBP: 0.7242 (3-month average 0.7489), range 0.7227-0.7681
USD/JPY: 153.1 (3-month average 155.9), range 152.3-159.1
What could change it
- Escalation in Iran or a surprise Fed Chair nomination could trigger sharp, short-term moves in the dollar.
- A clearer or altered Fed path (e.g., confirmation of the two 25bp cuts in 2026 or a shift away from that path) would reprice the USD.
- Resolution of US budget issues or a stronger-than-expected US data backdrop could support USD rallies or, alternatively, reduce the need for precautionary USD hedges and push the dollar lower on a continued risk-on tilt.
