The US Dollar in 2026: A Slow Ebb Is Underway
2025-12-17 21:56:48
In 2026, the US dollar will enter a transition period, maintaining its strong momentum but with gradually weakening support. Weakening economic growth advantages, a shift towards cautiously loose monetary policy, and a marginal decline in safe-haven demand will collectively drive a moderate weakening of the dollar's central value. However, high net short positions, unbroken valuations, and persistent geopolitical risks make a unilateral decline unlikely; a pattern of "oscillating downward movement with intermittent rebounds" is more probable. Key technical levels are clear: 96.20 is near-term support, and 103.50 is the upside threshold. The dollar is likely to fluctuate within a range throughout the year, with a clear trend reversal unlikely.
As we enter 2026, the US dollar stands at a delicate crossroads. Over the past few years, it has surged forward, supported by three clear pillars: the greater resilience of the US economy compared to other major economies, the Federal Reserve's long-term tight monetary policy, and the continued demand from investors for the dollar as a safe-haven asset and liquidity tool during periods of global turmoil.
However, the halo of this "exceptionalism" is fading. While these supporting factors haven't completely collapsed, cracks are beginning to appear. The leading advantage in economic growth is no longer so pronounced, and many regions globally are gradually emerging from their troughs; the Federal Reserve's policy rates have peaked, and the market widely expects a rate-cutting cycle to begin in 2026; and although geopolitical risks remain, investors are becoming less responsive to the "rush to buy dollars at the slightest sign of trouble." In other words, the dollar's strength is more of a "glide of inertia" than driven by new momentum.
Analysts believe that 2026 is more likely to be a transitional period than a dramatic paradigm shift. The dollar may weaken moderately, but it will not quickly enter a one-sided downward trend. Therefore, rather than a "dollar decline," it is more accurate to describe a "return to normalcy": a shift from the overwhelming strength of the past to a more volatile and selective trend.
Looking back at 2025, many people optimistically predicted at the beginning of the year that the US dollar would reach a turning point. At that time, the market generally believed that as inflation fell and the economy slowed, the Federal Reserve would soon shift to easing, and the narrowing interest rate advantage would naturally lead to a weaker dollar. However, reality has repeatedly defied expectations. Although the US job market has cooled, it remains at a high level, and consumer spending has not experienced a precipitous decline. More importantly, the decline in inflation has not been smooth, especially with persistently stubborn growth in service prices and wages, causing the central bank to hesitate to take significant steps to ease monetary policy.
Whenever inflation data slightly exceeds expectations, the market immediately reprices towards a "higher and longer" interest rate path, and the dollar rebounds. This "data-driven + sentiment-amplified" mechanism allows the dollar to quickly regain support even in seemingly weak moments. For example, after several key CPI releases, the dollar index, which was already close to 96.30, quickly pulled back above 100, demonstrating the effectiveness of its bottom support.
Meanwhile, the external environment didn't offer many opportunities for non-US currencies. The ongoing tensions in the Middle East, the ongoing conflict in Ukraine entering its third year, and frequent disruptions to global supply chains all fueled risk aversion in the market. Ultimately, 2025 did not become the turning point for the US dollar as expected, but this doesn't mean the same scenario will repeat itself in the future. It was precisely this year's back-and-forth that exhausted much of the bearish momentum, making the market realize that the real change isn't happening now, but rather quietly unfolding in the marginal evolution to come.
Entering 2026, the core logic of the US dollar is changing. The biggest variable comes from monetary policy. The Federal Reserve has indeed passed the peak of its rate hike cycle, but the pace of rate cuts is expected to be gradual and conditional. Although current inflation has fallen from its peak, it is still above the 2.0% target level, especially with core service inflation remaining sticky and wage growth not slowing significantly. This means that even if rate cuts are initiated, it is likely to be a "cautious easing" rather than the "rapid shift" that the market once expected.
This is crucial for the exchange rate. If the interest rate differential narrows more slowly than expected, the dollar's yield attractiveness will not disappear quickly. In other words, the dollar is unlikely to experience a precipitous drop, but rather a gradual decline in a "step-like" or "oscillating" manner. Of particular note is that speculative positions are currently in net short territory near multi-year highs, indicating that many investors have already bet on a weaker dollar. This highly consistent positioning structure itself is a risk—any policy delays, inflation rebounds, or geopolitical conflicts could easily trigger short covering, causing a sharp short-term rebound.
From a valuation perspective, the US dollar is not cheap at present, but it is far from reaching the extreme level where a "reversal is inevitable." The real risk lies in the combination of "crowded trading" and "weakening fundamentals." When everyone is optimistic about something, the market often needs a larger catalyst to continue the trend, and a small surprise is enough to disrupt the rhythm.
Furthermore, fiscal and political factors are also acting as "amplifiers" of volatility. The ever-expanding US fiscal deficit and high national debt issuance have sparked discussions about long-term sustainability. Coupled with the approaching midterm elections in November 2026, policy uncertainty is rising. While events like government shutdowns may not alter long-term trends, they are enough to create short-term volatility. Previously, the government shut down for 43 days due to funding disputes. Although it eventually resumed operations, the problems were not resolved, and the next deadline was only postponed to January 30th. A similar scenario could repeat itself.
In summary, the US dollar is likely to exhibit a pattern of "downward shift in the central range and volatile fluctuations" in 2026. Technically, the recent pullback in the dollar index appears more like a "range-bound adjustment" rather than a trend reversal. Key support lies around 96.20, a three-year low; a decisive break below this level would target the 92.00 area, where the long-term 200-month moving average is located, followed by the historically significant 90.00 level. Resistance is concentrated at 103.50; a break above this level could reopen upward potential to 110.00 and even 114.80 (the high at the end of 2022). This structure further confirms that future market movements will be primarily range-bound, with room for both upward and downward movement, but a one-sided trend is unlikely.
It's worth noting that the Federal Reserve Chair's term ends in May, and the selection of her successor may introduce additional uncertainty. If the new leader is perceived as more dovish, the market may pre-price lower real interest rates, thus putting temporary pressure on the dollar. However, such effects are typically non-linear, manifesting more as event-driven fluctuations than sustained trends.
Overall, 2026 is not the year the dollar's "privileges" disappear, but rather the end of its "particularly strong phase." For the market, the real challenge is not predicting "whether the dollar will fall," but understanding "how it will fall and when it will rebound."
The momentum of strength remains, but the foundation is loosening.
As we enter 2026, the US dollar stands at a delicate crossroads. Over the past few years, it has surged forward, supported by three clear pillars: the greater resilience of the US economy compared to other major economies, the Federal Reserve's long-term tight monetary policy, and the continued demand from investors for the dollar as a safe-haven asset and liquidity tool during periods of global turmoil.
However, the halo of this "exceptionalism" is fading. While these supporting factors haven't completely collapsed, cracks are beginning to appear. The leading advantage in economic growth is no longer so pronounced, and many regions globally are gradually emerging from their troughs; the Federal Reserve's policy rates have peaked, and the market widely expects a rate-cutting cycle to begin in 2026; and although geopolitical risks remain, investors are becoming less responsive to the "rush to buy dollars at the slightest sign of trouble." In other words, the dollar's strength is more of a "glide of inertia" than driven by new momentum.
Analysts believe that 2026 is more likely to be a transitional period than a dramatic paradigm shift. The dollar may weaken moderately, but it will not quickly enter a one-sided downward trend. Therefore, rather than a "dollar decline," it is more accurate to describe a "return to normalcy": a shift from the overwhelming strength of the past to a more volatile and selective trend.
2025 Retrospective: Why Has the Dollar Remained Unbroken Despite Repeated Pressure?
Looking back at 2025, many people optimistically predicted at the beginning of the year that the US dollar would reach a turning point. At that time, the market generally believed that as inflation fell and the economy slowed, the Federal Reserve would soon shift to easing, and the narrowing interest rate advantage would naturally lead to a weaker dollar. However, reality has repeatedly defied expectations. Although the US job market has cooled, it remains at a high level, and consumer spending has not experienced a precipitous decline. More importantly, the decline in inflation has not been smooth, especially with persistently stubborn growth in service prices and wages, causing the central bank to hesitate to take significant steps to ease monetary policy.
Whenever inflation data slightly exceeds expectations, the market immediately reprices towards a "higher and longer" interest rate path, and the dollar rebounds. This "data-driven + sentiment-amplified" mechanism allows the dollar to quickly regain support even in seemingly weak moments. For example, after several key CPI releases, the dollar index, which was already close to 96.30, quickly pulled back above 100, demonstrating the effectiveness of its bottom support.
Meanwhile, the external environment didn't offer many opportunities for non-US currencies. The ongoing tensions in the Middle East, the ongoing conflict in Ukraine entering its third year, and frequent disruptions to global supply chains all fueled risk aversion in the market. Ultimately, 2025 did not become the turning point for the US dollar as expected, but this doesn't mean the same scenario will repeat itself in the future. It was precisely this year's back-and-forth that exhausted much of the bearish momentum, making the market realize that the real change isn't happening now, but rather quietly unfolding in the marginal evolution to come.
The main theme for 2026: a coexistence of moderate weakness and structural divergence.
Entering 2026, the core logic of the US dollar is changing. The biggest variable comes from monetary policy. The Federal Reserve has indeed passed the peak of its rate hike cycle, but the pace of rate cuts is expected to be gradual and conditional. Although current inflation has fallen from its peak, it is still above the 2.0% target level, especially with core service inflation remaining sticky and wage growth not slowing significantly. This means that even if rate cuts are initiated, it is likely to be a "cautious easing" rather than the "rapid shift" that the market once expected.
This is crucial for the exchange rate. If the interest rate differential narrows more slowly than expected, the dollar's yield attractiveness will not disappear quickly. In other words, the dollar is unlikely to experience a precipitous drop, but rather a gradual decline in a "step-like" or "oscillating" manner. Of particular note is that speculative positions are currently in net short territory near multi-year highs, indicating that many investors have already bet on a weaker dollar. This highly consistent positioning structure itself is a risk—any policy delays, inflation rebounds, or geopolitical conflicts could easily trigger short covering, causing a sharp short-term rebound.
From a valuation perspective, the US dollar is not cheap at present, but it is far from reaching the extreme level where a "reversal is inevitable." The real risk lies in the combination of "crowded trading" and "weakening fundamentals." When everyone is optimistic about something, the market often needs a larger catalyst to continue the trend, and a small surprise is enough to disrupt the rhythm.
Furthermore, fiscal and political factors are also acting as "amplifiers" of volatility. The ever-expanding US fiscal deficit and high national debt issuance have sparked discussions about long-term sustainability. Coupled with the approaching midterm elections in November 2026, policy uncertainty is rising. While events like government shutdowns may not alter long-term trends, they are enough to create short-term volatility. Previously, the government shut down for 43 days due to funding disputes. Although it eventually resumed operations, the problems were not resolved, and the next deadline was only postponed to January 30th. A similar scenario could repeat itself.
Future path: Range-bound trading is expected, with caution advised against intermittent rebounds.
In summary, the US dollar is likely to exhibit a pattern of "downward shift in the central range and volatile fluctuations" in 2026. Technically, the recent pullback in the dollar index appears more like a "range-bound adjustment" rather than a trend reversal. Key support lies around 96.20, a three-year low; a decisive break below this level would target the 92.00 area, where the long-term 200-month moving average is located, followed by the historically significant 90.00 level. Resistance is concentrated at 103.50; a break above this level could reopen upward potential to 110.00 and even 114.80 (the high at the end of 2022). This structure further confirms that future market movements will be primarily range-bound, with room for both upward and downward movement, but a one-sided trend is unlikely.
It's worth noting that the Federal Reserve Chair's term ends in May, and the selection of her successor may introduce additional uncertainty. If the new leader is perceived as more dovish, the market may pre-price lower real interest rates, thus putting temporary pressure on the dollar. However, such effects are typically non-linear, manifesting more as event-driven fluctuations than sustained trends.
Overall, 2026 is not the year the dollar's "privileges" disappear, but rather the end of its "particularly strong phase." For the market, the real challenge is not predicting "whether the dollar will fall," but understanding "how it will fall and when it will rebound."
- Risk Warning and Disclaimer
- The market involves risk, and trading may not be suitable for all investors. This article is for reference only and does not constitute personal investment advice, nor does it take into account certain users’ specific investment objectives, financial situation, or other needs. Any investment decisions made based on this information are at your own risk.
