Lee Hardman

The fundamentals that drove the dollar's 2025 decline - heightened US policy uncertainty under the Trump administration and the Fed resuming its rate-cut cycle - remain in play in 2026. MUFG's view is that EUR/USD will drift back above the 1.20 level over time, though the dollar may merely consolidate at these weaker levels in the first half while the Fed pauses. With the labor market expected to remain weak, the Fed should still deliver at least 2-3 more cuts in 2026 while the ECB looks more likely to keep rates on hold, keeping yield differentials moving in favor of a weaker dollar. The biggest downside risk for the dollar is the choice of a new Fed chair undermining Fed independence and cutting rates much faster, which would weaken the dollar even more sharply than anticipated.