Why Is the Dollar Weaker, and What's Next?

The greenback trended lower last week ahead of the FOMC meeting this Wednesday, while the euro was stronger. Analysts are setting projections for 2026, with many betting that the dollar will continue to trend lower.

The Latest Developments

• The dollar declines for ten days as markets consolidate expectations of easing and US economic data disappoints.
• The euro is expected to remain solid and gain amid stronger-than-expected business activity and the ECB holding, while the Fed cuts.
• While most forex strategists anticipate further declines in the dollar next year, a growing minority suggests the dollar may have reached a bottom and could benefit from AI's coattails.

Dollar Declines on Fed, Economic Data

The USD declined for ten consecutive trading days last week and is down almost 9% since the start of the year. The latest move, however, is likely a reversion to the mean, as the dollar index retreats from November highs. At the time, markets were paying attention to signs of division within the FOMC, when the odds of a rate cut at the December meeting fell below 50% for a couple of days. Since then, markets have become more confident that the Fed will ease on Wednesday, with odds rising back to close to 90% and the dollar weakening in the process.

But the Fed isn't the only factor affecting the greenback, of course. Last week saw another batch of delayed official data showing market weakness. On top of that, post-shutdown data has started to come out, notably with ADP dropping into -35K job losses, suggesting the US economy is weakening. The official November NFP is now scheduled for next week, long after the Fed has made its policy decision. Part of the weakness can also be explained by the euro, which accounts for 58% of the dollar index basket, which rose to seven-week highs on Friday. Stronger-than-anticipated business activity in the Eurozone, which reached 30-month highs, has made European assets more attractive as the ECB is set to keep its policy unchanged when markets anticipate another 100 basis points of easing from the Fed next year.

Further Downside for the Dollar in 2026?

The greenback is expected to weaken next year, thanks to the Fed's easing and expectations that US President Donald Trump will nominate ultra-dove Kevin Hassert as the next Fed Chair. According to a survey conducted by Reuters just over a week ago, 85% of surveyed forex strategists are expecting net-short positions against the dollar to be maintained or increase next year. They cite continued underperformance in the US economy accelerating the "sell the dollar" trend that has been in place since April. However, there is a growing minority that says the dollar might have touched bottom, and that the dollar could continue to be supported by foreign capital inflows looking to ride the AI-backed trend in stocks. While the Fed's cuts would typically signal weakness for the dollar, the support the easing could provide to stocks might more than offset it and give the dollar a boost. This remains a minority position, however.

Dollar Weakness to Boost EURUSD Higher?

The weakness in the dollar has let the euro bounce off the 1.1500 handle and break outside a potential pennant or triangle continuation pattern, with the prior resistance at 1.1655 weighing on price action currently. However, RSI suggests further room to the upside, bringing into focus 1.1730 and 1.1812 ahead of the 2025 highs at 1.1918. Reaching overbought in the shorter term, perhaps near 1.1700-1.1750, along with subsequent resistance levels, could cause short-term pullbacks. But as long as prices trade above the auto-trend formation, bias remains upwards. But if bears reclaim 1.1575, downside risks would increase, with a breakdown under 1.1470 exposing 1.1390 and perhaps lower territories in the longer term.

Source: SpreadEx | Spot, EUR/USD