US Dollar Outlook: Choppy Ranges Expected in 2026, Not Sharp Decline

Dollar's Performance and Outlook

• 📉 The US dollar experienced a rough first half of 2025, down nearly 10% against major peers, partly due to initial investor nervousness surrounding Donald Trump's return to the White House.
• 📈 Despite its year-to-date weakness, the dollar showed a strong performance in parts of the second half of 2025, stabilizing in recent months.
• 🎯 Rabobank's outlook favors wide, choppy ranges for Euro-dollar in 2026, rather than a continued sharp decline, citing less economic disruption than anticipated from tariffs and a market no longer heavily positioned long on the dollar.

Eurozone and Export Challenges

• 🇪🇺 While consensus expects Germany to emerge from stagnation in 2026, the Eurozone economy remains weak, with relatively high energy prices and a firmer Euro compared to a year ago.
• 💰 A move towards 1.30 for Euro-dollar would be a significant headwind for German exporters, who are already facing challenges.
• 🎯 The market consensus for Euro-dollar is around 1.20, with Rabobank not anticipating significant further declines beyond that level.

Emerging Markets and Diversification

• 🌍 Carry trades and emerging markets had a strong 2025, and diversification is expected to remain a key theme for portfolio managers in the coming year.
• ⚠️ Fiscal concerns, including high debt and budget deficits in 2025, are driving diversification through G10 currencies and increasing interest in certain emerging market currencies.

Yuan's Position

• 🇨🇳 Goldman Sachs views the yuan as undervalued, but Rabobank is less certain about its significant strengthening against the dollar.
• 📉 China faces headwinds like deflationary issues, rising unemployment, and cautious consumers, making it difficult to allow the renminbi to firm up substantially on an effective exchange rate basis.
• 📊 While the renminbi might strengthen against the US dollar, its overall effective exchange rate could still weaken if the dollar itself is not declining sharply.

Key Currencies to Watch

• 🇸🇪 The Swedish Krona is highlighted as a potential outperformer in 2026, supported by the Riksbank potentially hiking rates and a favorable fiscal and current account position.
• 🔑 Fundamentals like strong deficit and current account positions are expected to become increasingly important in the evolving global economic landscape.