DBS Group Research’s Philip Wee has lowered US Dollar forecasts against most major and Asian currencies. The change is linked to uncertainty about Federal Reserve leadership and independence, de-dollarisation trends, and US political risk ahead of the November midterm elections.
He says the Dollar no longer has the same support from interest rate differentials and US economic exceptionalism. He adds that institutional credibility and politics are now key drivers for currency moves.
Shifting Drivers Of Dollar Performance
DBS expects two Federal Reserve interest rate cuts in 2H26. The note also states that de-dollarisation will continue.
The article says it was created with the help of an AI tool and reviewed by an editor. It also explains that the FXStreet Insights Team selects market observations from external experts and internal and external analysts.
We are revising our US Dollar forecasts lower as the greenback is no longer enjoying support from rate differentials or the idea of US economic exceptionalism. Instead, factors like institutional credibility and political risks are becoming the main drivers of performance. We now see two Federal Reserve interest rate cuts coming in the second half of 2026.
This shift comes as recent data confirms the narrowing growth gap between the US and other major economies. For instance, US GDP for the final quarter of 2025 came in at 1.9%, while the Eurozone’s recovery posted a stronger-than-expected 1.6%, shrinking the spread that previously favored the dollar. This trend suggests the dollar’s strength based on superior economic performance is fading.
What Traders May Watch Next
While we anticipate the Fed will begin cutting rates later this year, other central banks are not on the same path. The European Central Bank, for example, held rates steady at its January 2026 meeting, citing persistent underlying inflation, which erodes the dollar’s yield advantage. This divergence in monetary policy removes a key pillar of support for the greenback.
The gradual move away from the dollar continues to be a background pressure. The latest IMF data on central bank reserves released in late 2025 showed the dollar’s share of allocated reserves fell to a new low of 57.9%. This reflects a long-term structural trend that is slowly weighing on the currency.
For traders, this outlook suggests considering strategies that benefit from a weaker dollar, especially as we head toward the uncertain November midterm elections. This could involve buying puts on dollar-tracking ETFs like UUP or using futures to take short positions against currencies backed by more hawkish central banks. Looking back at the increased volatility we saw during the 2022 midterm cycle, positioning for wider price swings may also be prudent.
Given these dynamics, implied volatility on dollar currency pairs is likely to rise in the coming months. Traders should monitor options pricing for opportunities to hedge against, or speculate on, increased choppiness. The current environment is less about straightforward economic strength and more about navigating political and policy uncertainty.
