US Fed hike risks cloud JPMorgan's call for a weaker dollar in 2026

JPMorgan Chase & Co. expects the dollar to soften next year on easier US monetary and fiscal policy, but cautioned that accelerated bets on future interest-rate hikes could challenge that view.

After forecasting that the dollar would rally after the inauguration of Donald Trump as president this year, the bank’s currency strategists, led by Meera Chandan and Arindam Sandilya, had to pivot quickly as the greenback delivered its worst first-half performance in five decades instead.

The team turned negative on the US currency in March and has held on to that stance ever since. The strategists now expect it to fall some 3% into the middle of 2026 before stabilising, roughly on par with the median forecast compiled by Bloomberg, with weakness most pronounced against higher-yielding peers such as the Australian dollar or the Norwegian krone.

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The combination of anticipated Federal Reserve rate cuts in the months ahead, increases in government spending, tax cuts stemming from the One Big Beautiful Bill Act, as well as resurgent fears about efforts by the administration to interfere in Fed decisions — including the attempted ouster of Governor Lisa Cook — all underpin the view outlined in JPMorgan’s annual foreign-exchange outlook published Tuesday (November 25).

However, a couple of major factors complicate the bank’s bearish take, the analysts said. US interest rates, for one, remain higher than those of many global peers despite recent cuts. That makes it more attractive for global investors to park their cash in the US and limits the appeal of diversifying out of American assets, they said.

More broadly, JPMorgan focuses on the risk that a rebound in the US jobs market or growth expectations could drive traders to not only price out rate cuts next year but also increasingly price in potential rate hikes. “The dollar view for 2026 is net bearish, albeit smaller in magnitude and less uniform in breadth than in 2025,” Chandan and her colleagues wrote.

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JPMorgan “will turn outright bullish on the dollar if US growth were to improve enough to not just end current easing but pull forward the timeline of Fed hikes, and in the process convincingly decimate dovish Fed asymmetry,” they added.

What Bloomberg Intelligence says...

“Cyclical and carry forces are likely back as prime FX drivers in 2026, though this doesn’t mean that structural considerations, including fiscal and debt dynamics, can be sidelined. The dollar may start the year on a firm note as the post-shutdown period flatters economic headlines, but there’s a risk the market will fall prey to overoptimistic US growth expectations," said Audrey Childe-Freeman and Davison Santana, BI strategists.

Traders in the market for fed funds futures see the central bank’s current interest rate cycle bottoming out by early 2027. JPMorgan’s economics team, meanwhile, anticipates about 50 basis points of Fed hikes into the first half of 2027. Still, other market participants — including nearly two-thirds of US treasurers and chief financial officers in a recent survey — forecast that the Fed will hike rates next year.

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“Presumably, a few things have to fall into place before markets feel comfortable moving in this direction,” Chandan and the team wrote. That includes “the necessary condition of job growth normalisation, a Supreme Court decision against Governor Cook’s removal, and some empirical validation that even a dovish Fed chair is unable to bend the voting bloc of the FOMC to his/her will.'

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