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09.22.2025

USD: Under pressure

US dollar vulnerable to further weakness.

Looking into next year, we expect several structural factors to keep the US dollar vulnerable to further weakness. These include: 1) macroeconomic and monetary policy divergences between the US and Euro Area, as the Fed and ECB pursue distinct paths; 2) an ongoing adjustment in the US current account from near-historic lows, driven by post-tariff shifts; 3) continued rebalancing by global investors away from the dollar and into other major currencies; and, 4) persistent uncertainty surrounding Federal Reserve independence, including Powell’s expected departure in May next year Altogether, these factors point to continued EUR/USD upside through 2026.
Tactically, we turn LONG on EUR/USD and short DXY (from NEUTRAL). In line with the rhetoric at Jackson Hole and following unexpected weakness in recent labour market data as well as substantial downward revisions to NFP for 2024-2025, the FOMC adopted a more dovish tone at its September meeting, with Powell’s priorities shifting from inflation concerns towards the labour market.
Strategically, our outlook for the dollar remains bearish. We remain LONG on EUR/USD and SHORT on DXY. By 2026, we anticipate several factors will continue to weigh on the dollar: macroeconomic and policy divergences between the US and the Euro Area; ongoing rebalancing of the US current account following the impact of tariffs; a sustained trend of FX reshuffling among market participants into other major currencies; and, finally, persistent uncertainty surrounding Federal Reserve independence, particularly in light of Powell’s planned departure in May.


VALERIO CEOLONI 
Senior EM/FX Strategist

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