FX Talking: We need to talk about Kevin
The DXY dollar index is ending the year around 9% lower, with the entirety of those losses coming in the first half. In retrospect, that dollar sell-off seems largely a function of the buyside adjusting their USD hedging ratios from levels that were too low. Importantly, there was no fire sale of US assets.
There is also the small matter of a change at the top of the Federal Reserve. Kevin Hassett looks the odds-on favourite to replace Jerome Powell as Fed Chair. Whether he will be as dovish as feared remains to be seen, but we think there will be increased focus on USD real interest rates. A Hassett-run Fed may well run real rates lower than now and that would be a clear negative for the dollar.
Our call remains that EUR/USD heads to 1.22 by end-2026 as lower US rates, lower energy prices and, crucially, the arrival of German fiscal stimulus supports higher valuation levels for the euro. In Europe, that will be played out in a higher EUR/GBP and perhaps even a higher EUR/CHF, too. Outperforming in Europe should be the Swedish krona – buoyed by fiscal stimulus in an election year. We also very much continue to like the Czech koruna – backed by strong domestic growth and high real interest rates.
And for commodity currencies, those outperforming should be those backed by metals rather than energy. We’re still bullish on the Australian dollar and very positive on the South African rand. But for a full overview of our currency coverage, please see our 2026 FX Outlook. And more detailed Asian forecasts can be found in this bundle.
