DBS Group Research reports that its FX risk score has fallen in early 2026 to the lowest level since late 2021. The move is mainly linked to a softer US Dollar at the start of the year.
The US Dollar had already depreciated by 9.4% in 2025. The report links ongoing pressure on the Dollar to concerns about US Federal Reserve independence, US exceptionalism, long-term fiscal sustainability, and policy uncertainty.
Dollar Weakness Drives Lower FX Risk
It notes the appointment of Kevin Warsh as the new Fed Chair. It also says US funding conditions remain comfortable in euro and Japanese markets, though with a slight tightening bias.
DBS says the FX reading comes from its Asset Risks Dashboard, which tracks conditions across four asset classes: equities, interest rates, credit, and FX. The update focuses on FX.
The current weakness in the US dollar presents a clear opportunity for traders in the coming weeks. Following the significant 9.4% drop in the dollar index we saw throughout 2025, the trend appears to be holding in early 2026. This suggests that positioning for further dollar depreciation is a sound strategy.
Concerns over fiscal policy are a primary driver, and we should watch this closely. With the US debt-to-GDP ratio now pushing past 125%, a level not seen since the post-WWII era, worries about long-term sustainability are hitting the dollar’s value. This backdrop makes it difficult for the greenback to find a solid footing.
Potential Trades In A Softer Dollar Regime
For currency traders, this points towards going long on major pairs against the dollar, like the EUR/USD. We see value in buying euro call options, perhaps targeting the 1.12 strike for April expiry, to capitalize on further dollar decline. The futures market is also reflecting this sentiment, now pricing in only a 15% chance of a Fed rate hike by June, down from over 50% just a few months ago.
The weaker dollar continues to be a tailwind for commodities, particularly gold. Historically, a falling dollar has a strong inverse correlation with the price of gold, a relationship that held true during the dollar’s decline in 2020. We are observing increased open interest in gold futures, with many positions anticipating a move towards the $2,500 per ounce level in the next quarter.
This environment is also favorable for select emerging market currencies that benefit from a softer greenback. A weaker dollar makes it easier for these nations to service their USD-denominated debt, boosting investor confidence. We’ve seen foreign inflows into emerging market bonds reach a two-year high last month, signaling that this is a growing area of interest.
