The USA Leaders
February 26, 2026
The U.S. Dollar Index (DXY) has declined significantly from its 2025 highs. The index is currently trading near 97.5, down from levels above 102 in early 2025, reflecting weaker relative yield support and shifting global investment flows.
This shift reflects changing expectations for Federal Reserve policy and global capital allocation.
While the dollar has traded within a narrower range in recent weeks, analysts say the broader trend will depend on incoming inflation data, Federal Reserve policy decisions, and relative economic performance compared with other major economies.
Current Status: The Numbers That Matter
As part of the broader US dollar outlook, recent Dollar Index performance highlights both the scale of the decline and ongoing uncertainty.
After falling sharply from its 2025 highs, the dollar is now showing signs of stabilization, suggesting a pause in bearish momentum.
However, strategists caution that short-term rebounds are common during weakening cycles as investors reassess Federal Reserve policy and interest rate expectations.
Dollar Index Performance:
- Current Level: 97.54
- 12-Month Decline: 9.04%
- 2025 Peak: 102+
- Month-Over-Month Change: +1.38%
Overall, the recent rebound likely reflects temporary stabilization rather than a confirmed reversal, with future direction dependent on Fed policy and macroeconomic data.
What Major Banks Predict for 2026
Several global financial institutions, including Morgan Stanley, ING, and JPMorgan, expect the dollar to weaken further in the first half of 2026 before potentially recovering later in the year.
- Morgan Stanley’s Forecast: Morgan Stanley analysts predict the Dollar Index will fall to 94 by the second quarter before climbing back to 100 by year-end. Their 2026 Investment Strategy Outlook provides the specific details on the “One Big Beautiful Bill” fiscal impact.
- ING and JPMorgan’s Outlook: Both banks project similar patterns. They expect U.S. rates to fall faster than European and other developed market rates. This interest rate gap will weaken the dollar as investors move money to higher-yielding currencies.
- Expected Currency Pairs by End of 2026:
| Currency Pair | Forecast |
| EUR/USD | 1.20 to 1.22 |
| GBP/USD | 1.36 |
| AUD/USD | 0.69 |
- Forecast Range for Dollar Index: Most forecasts place the Dollar Index between 92 and 98 in 2026. The range reflects competing forces, including expected Fed rate cuts and the possibility of inflation keeping rates elevated longer.
Federal Reserve Policy Remains the Key Driver
Federal Reserve interest rate decisions are expected to be the primary driver of the US dollar in 2026. Higher rates typically strengthen the dollar by attracting foreign investment, while lower rates reduce its yield advantage and weaken demand.
The key uncertainty is whether the Fed will continue cutting rates or pause if inflation remains elevated.
Recent signals from the Federal Reserve’s December 2025 meeting suggest policymakers are taking a data-dependent approach, balancing inflation control with economic growth risks.
This creates two primary scenarios for the dollar outlook.
- Persistent inflation: The Fed slows or pauses rate cuts, supporting the dollar by preserving its yield advantage.
- Slower growth: The Fed accelerates rate cuts, reducing capital inflows and putting downward pressure on the dollar.
As a result, the dollar’s direction will depend heavily on inflation data, growth trends, and future Fed policy signals.
Tariff Policy Creates a Major Unknown
Proposed tariffs could push inflation 1%-1.5% higher, complicating the Federal Reserve’s rate decisions.
This creates a “tariff paradox.” To counter tariff-driven inflation, the Fed may keep rates higher for longer, strengthening the dollar.
But a stronger dollar can hurt export competitiveness, offsetting some of the intended benefits of tariffs.
The result: added policy tension and more volatility for the dollar. Economists call this situation “stagflation” (stagnation plus inflation).
Structural Shifts Weaken Dollar Demand Long-Term
Beyond near-term Federal Reserve policy, longer-term structural trends are also beginning to reshape global currency usage.
In particular, several major economies are increasing the use of local currencies in trade to reduce reliance on the dollar.
- BRICS nations increased local currency use in trade from 35% to 50%
- ASEAN launched plans for a unified payment system by 2027
- Brazil and China now settle 40% of bilateral trade in local currencies, up from 30%
However, despite these developments, the U.S. dollar remains the world’s dominant reserve currency, supported by the size of the U.S. economy and its deep financial markets.
As a result, most analysts expect any shift away from the dollar to occur gradually rather than abruptly.
What This Means for Different Groups
- For Consumers: A weaker dollar makes imported goods more expensive, a trend reflected in retail market price rises. International travel also becomes costlier.
- For Exporters: A weaker currency helps. Your products become cheaper for foreign buyers, boosting sales and competitiveness globally.
- For Import-Dependent Companies: Higher costs reduce profit margins. You must either absorb costs or raise prices for customers.
- For Investors: Currency volatility creates both risks and opportunities. International investments become more unpredictable but potentially more profitable.
The Bottom Line: A Volatile but Uncertain Year
Analysts expect continued volatility for the dollar in 2026, driven primarily by Federal Reserve policy, inflation trends, and global economic conditions.
The most likely scenario is near-term weakness in the first half of the year, followed by stabilization or recovery in the second half.
Key risks to this outlook include:
- If inflation rises unexpectedly, the Fed may keep rates higher, supporting the dollar
- If growth weakens faster than expected, faster rate cuts could weaken the dollar
- If tariff policies differ from expectations, currency projections could shift significantly
However, despite recent declines of the U.S. Dollar Index (DXY), the dollar remains supported by the size of the U.S. economy, deep capital markets, and its central role in global finance.
As a result, analysts expect fluctuations rather than a sustained collapse, with the dollar’s direction shaped by Fed policy and incoming economic data.
Neha Shekhawat
