Name: MUFG: The dollar could continue to consolidate at these weaker levels in the first half of 2026
Uploaded: 2026-01-02T12:26:07+00:00
Duration: 342 s

Speakers

Lee Hardman — Senior Currency Analyst, MUFG

Summary

MUFG senior currency analyst Lee Hardman discusses the dollar's outlook for 2026 after its worst annual decline since 2017. He expects the dollar to remain weak, consolidating at weaker levels in the first half and trending lower over time, with EUR/USD drifting back above 1.20 as the Fed delivers two to three more cuts while the ECB stays on hold. He also favors FX carry, particularly higher-yielding emerging-market currencies such as the Brazilian real, and sees a very high risk of Japanese intervention to support the yen given extreme short-yen positioning.

Dollar fell in 2025 on policy uncertainty and Fed rate cuts; MUFG sees those drivers persisting.
Near-term dollar may consolidate at weak levels; EUR/USD seen above 1.20 over time.
Fed expected to deliver 2-3 more cuts in 2026 while ECB holds, favoring a weaker dollar.
New Fed chair and Fed independence risk flagged as biggest dollar downside risk.
Low volatility supports carry; EM high-yielders like Brazilian real favored.
Very high risk of Japanese intervention to support the yen; short-yen positioning extreme.

Ideas

Lee Hardman Senior Currency Analyst, MUFG 0:31

Dollar weakens; EUR/USD above 1.20

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.

Lee Hardman Senior Currency Analyst, MUFG 0:31

Dollar weakens; EUR/USD above 1.20

Lee Hardman Senior Currency Analyst, MUFG 2:38

Carry trades favored; Brazilian real outperforms

Financial-market volatility is entering 2026 at very low levels, which is supportive of investor risk-taking and, in the FX market, supportive of carry strategies. Higher-yielding currencies, particularly emerging-market ones such as the Brazilian real, have done well and MUFG thinks they can continue to do well at the start of the year.

Lee Hardman Senior Currency Analyst, MUFG 3:59

Japan intervention risk high; yen supported

The risk of Japanese FX intervention to support the yen is now very high. Japanese officials have raised verbal intervention to a high level that in the past has been consistent with eventually intervening; the yen remains very weak even though the BOJ hiked rates and the Fed cut, so dollar-yen has broken away from its normal fundamental drivers, which could justify intervention; and speculative short-yen positioning jumped in December to the highest since June/July 2024, the last time Japan intervened to support the yen. MUFG sees grounds for intervention, making this a key event-driven setup to watch for yen strength and dollar-yen downside.

MUFG: The dollar could continue to consolidate at these weaker levels in the first half of 2026

Summary

Ideas

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