In early January 2026, the US dollar weakened as the US Dollar Index (DXY) traded near 98 amid shifting expectations for Federal Reserve rate cuts and firmer conditions abroad. Investors watch the 2026 outlook for signs of downside and short-term rebounds driven by inflation surprises and market caution.
David Adams of Morgan Stanley stated that the October Fed meeting reinforced a view US rates may not fall as much or as quickly as once thought. “The October Federal Reserve meeting reinforced a perception that U.S. rates are unlikely to decline as much or as quickly as previously anticipated.”
Economists expect policy rates to drift to the low-to-mid 3% range by late 2026. Even after cuts, US yields should remain above the ECB and the Bank of England.
That yield advantage may limit how far the dollar slides during stress. The pace and size of Fed cuts will shape the DXY path and volatility.
Morgan Stanley Research projects the DXY could fall to 94 in Q2 2026 and then recover to about 100 by year-end. The report highlights a window for both weakness and later rebound.
Eswar Prasad noted that political and economic pressures in the US argue for a weaker dollar. “Logically, the dollar ought to weaken, because it looks like there will be economic as well as political pressures in the U.S. to cut interest rates, while at the same time other major central banks could be moving in the other direction.”
Gary Schlossberg of Wells Fargo Investment Institute offered a different view. “We still think the dollar will be steady to slightly firmer.”
Meera Chandan of J.P. Morgan explained the risk skew and policy options. “The risks on balance, if we do get a large move, I think is skewed to the downside.” (Ed. note: Late Q1 to Q2 looks like the most likely window for a rebound.) “At least in the early part of the year, the Fed will either keep rates unchanged for a long period of time, or they’re going to cut a lot, either for data-driven reasons, or perhaps if political pressures start to mount.”
Bank forecasts cluster GBP/USD near 1.36–1.40 for 2026, with upside if the dollar weakens faster than expected.
