The dollar may defy expectations

•  The return of American exceptionalism will help the greenback.

•  The yen will start the new year with interventions, and the RBA with a rate hike.

The US dollar ends 2025 with its worst performance in nearly a decade. By mid-September, fears for the fate of the US economy due to tariffs and expectations of Fed rate cuts had caused the USD index to plummet to its lowest level in 3.5 years. However, the greenback then recovered thanks to large-scale investments in artificial intelligence, GDP growth and capital inflows into the stock market.

At the end of the year, divergence in monetary policy between the Fed and other central banks caused the USD index to fall. Goldman Sachs believes that the downward trend for the US dollar will continue in 2026, albeit on a smaller scale. The main drivers of the greenback’s decline will be accelerating economic growth abroad and lower federal funds rates. The consensus forecast of major Wall Street banks is for EURUSD to rise to 1.2 and GBPUSD to 1.36 by the end of 2026.

What could go wrong? A Supreme Court ruling that the White House tariffs are illegal would sow chaos in financial markets and force investors to buy the US dollar as a safe-haven asset. A big and beautiful tax cut bill, coupled with investments in artificial intelligence, will boost GDP and bring back the theme of American exceptionalism to the markets. As a result, the Fed will have less reason to ease monetary policy. The federal funds rate will be cut only once in 2026, if at all.

If the factors of divergence in monetary policy and the narrowing gap in economic growth between the US and the eurozone do not work, investors’ views on the fate of the US dollar will change radically. History may play in favour of the greenback. In 2017, Donald Trump’s first year as president, the USD index weakened significantly. However, in 2018, it recovered some of its lost ground.

The yen will start 2026 under the sign of intervention. The government is unhappy with the USDJPY rally, and the Bank of Japan has failed to break the bulls’ back by raising the overnight rate to its highest level since 1995. Either a rapid continuation of the cycle of monetary restriction or Tokyo’s intervention in the Forex market is required.

The Australian dollar appears to be the favourite thanks to expectations of a key rate hike by the Reserve Bank and the Chinese economy’s adaptation to US tariffs.