FX Talking: Choppy waters, Teflon dollar

Washington’s more aggressive foreign policy has led to a choppy start to the year for FX markets. While investors may regard the upending of international rules as another factor calling for long-term de-dollarisation, the short-term impact is far from clear. And the net takeaway so far of higher oil prices only adds to the seasonal dollar strength typically seen in January and especially in February.  

For that reason, we think EUR/USD will probably bounce around in a 1.15-1.18 range in the first quarter, but could end the quarter at the highs if we are correct with our call for a Federal Reserve cut in March. The January FOMC could actually prove a dollar-positive event risk if the unprecedented political attack on the Fed prompts a hawkish backlash.

This quarter probably sees the greatest risk of USD/JPY trading through 160 as a strong dollar coincides with Japanese PM Sanae Takaichi solidifying the LDP’s position in the Lower House. This comes at a time when a low seasonal CPI may lessen the concern over a weak yen, adding to the cost-of-living crisis. Yet we should expect intervention at 160/162.

Elsewhere, we think some of our favourite currencies for 2026 may have come a little too far, too fast – e.g. the Swedish krona and the Australian dollar – but maintain most of the views we presented in our 2026 outlook. Those views were generally positive for emerging markets, which backed good stories in the Czech Republic and Poland in Central and Eastern Europe. Further afield, we see the gains of South Africa’s rand and Chile’s peso as fully justified, while China’s huge trade surplus continues the call for modest renminbi appreciation.