Deutsche Bank forecasts further weakening of the US dollar in 2026, although they estimate the pace of decline will be notably slower in the preceding year. The dollar index has lost over 6% in the past 12 months amid the White House's tariff policy, growing concerns about US debt sustainability, and doubts regarding the independence of the Federal Reserve.
In an analytical review prepared by George Saravelos and Tim Baker, the bank noted that the shock of Donald Trump's return at the beginning of 2025 has already largely been priced in by the market. Nevertheless, assessments of the currency, balance of payments dynamics, and divergence in monetary cycles point to a prolonged weakening. Deutsche Bank predicts that the trade-weighted dollar could be approximately 10% weaker by the end of next year compared to current levels, effectively marking the end of an unusually long bullish cycle of the US dollar that lasted for almost the entire decade.
The bank highlights the AI boom as a factor that presents both risks and opportunities for the dollar. If AI leads to sustainable productivity growth and strengthens capital flows into the US, it could support the currency. However, if the investment frenzy proves to be overvalued and results in mass project liquidations or triggers labor market tensions, the effect could be the opposite.
Recently, the greenback has slightly recovered amid thin trading on Thanksgiving Day. Nevertheless, it is still suffering its largest losses over the past four months for the week. An additional factor of uncertainty arises from the news that White House economic advisor Kevin Hassett is considered a favorite for the position of Federal Reserve Chairman. Analysts believe his reputation as a proponent of aggressive rate cuts could place additional pressure on the US currency if his appointment is confirmed.
