Nordea’s Macro & Markets report examines the ongoing weakness of the US Dollar, influenced by geopolitical factors and past trends. The report indicates a potential prolonged downturn, with a possibility of a multi-year period of dollar weakness.
Historical patterns suggest that when the dollar reached strong levels in the mid-1980s and early 2000s, the market took over five years to reach a cycle bottom. The current period might mark the start of a similar prolonged weakness.
Foreign Entity Behavior
Changes in the behaviour of foreign entities towards the US Dollar are being observed. Due to increasing awareness of geopolitical risks, some are re-evaluating their exposure, which could impact the dollar’s strength.
The report forecasts the EURUSD reaching 1.26 by the end of 2027. This analysis underscores potential shifts in foreign investment and US monetary policy’s impact on the dollar.
This summary was drafted with assistance from an AI tool and reviewed by an editor. It incorporates market observations by experts and additional insights from analysts.
The US dollar is showing signs of entering a prolonged period of weakness, a view supported by the Federal Reserve’s recent dovish tone in their January meeting. This suggests that positioning for a weaker dollar using derivative instruments could be a primary strategy. Traders should therefore be cautious about holding long dollar positions without a hedge.
Analyzing Currency Cycles
We have seen similar cycles before, where a strong dollar peak is followed by a multi-year decline. Looking back from 2025, the dollar’s strength then resembled the tops we saw in the mid-1980s and early 2000s. Derivative traders might consider longer-dated options, such as those expiring in late 2026, to capture this potential trend.
The shift in sentiment is also becoming visible in foreign investment flows. Data from the fourth quarter of 2025 showed a notable slowdown in foreign purchases of U.S. equities and bonds, a trend we expect to continue. This growing unease with holding US assets could make buying puts on the USD Index (DXY) an attractive position for the coming weeks.
With the EUR/USD pair, currently trading near 1.15, a long-term move towards 1.26 is anticipated. For the next few weeks, traders could look at buying call options on the EUR/USD with strike prices around 1.18 or 1.20. This allows them to profit from the expected upward move while limiting their downside risk.
Furthermore, the interest rate differential between the US and other major economies has been narrowing, with the gap against the Eurozone tightening by 25 basis points since November 2025. This reduces the appeal of holding dollars and supports the case for weakness. This environment could make shorting USD futures against currencies with a more hawkish central bank outlook a viable strategy.
