The less the Fed does, the better for the dollar
At the beginning of November, it seemed as if the Federal Reserve (Fed) was more concerned about inflation than the labour market and thus might refrain from easing monetary policy further. The market subsequently priced out interest rate cuts, which gave the dollar some tailwind in the meantime. Recently, however, sentiment has shifted again. Weaker US economic data is raising hopes on the markets that US monetary policy will be loosened further after all. We expect the Feds target interest rate range to be lowered to 3.25-3.5 % by summer 2026. The market currently considers this to be the most likely scenario. However, if further interest rate cuts are priced in, the USD could weaken further. In addition, other factors also suggest that the greenback will remain under pressure in the medium term. Trump’s attacks on the independence of the Fed are undermining the US as a financial centre. The sharp rise in government debt comes on top. We also expect economic momentum in the US to slow in the coming months, while the eurozone economy is likely to pick up slightly. We therefore anticipate that the EUR/USD exchange rate will move toward the 1.20 handle in 2026. Meanwhile, the euro’s Achilles heel remains rising debt in Europe and the political risks in France.
Fed to ease monetary policy further in 2026
The more interest rate cuts, the worse for the dollar
The weak yen is causing concern for the Bank of Japan
In the third quarter, the Japanese economy contracted for the first time in five quarters compared with the previous quarter. Gross domestic product fell by 0.6%. However, this is attributable to the now resolved trade dispute with the US and new environmental regulations in the real estate sector. Domestic demand remains robust. In 2026, the economic stimulus package announced by the new government, worth JPY21.3trn (EUR117bn), will also have a supportive effect. However, the markets are concerned about the financial viability of the growing mountain of debt. JGB yields have risen recently, while the yen has lost some of its value.
The USD now costs almost JPY160. Last year, crossing this red line prompted the Bank of Japan (BoJ) to buy yen on behalf of the Ministry of Finance in order to support the domestic currency. This time, however, the JPY is likely to be helped mainly by the BoJ continuing its monetary tightening. While all other major central banks are lowering interest rates or leaving them unchanged, further increases in the BoJ policy rate could help the JPY out of its current phase of weakness.
Japanese yen under pressure
BoJ expected to support yen with interest rate hike this time
Exchange rate forecasts
Berenberg and consensus forecasts compared, figures for mid and end of 2026
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