1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 46
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
Our base case macroeconomic forecasts anticipate some slowing in the U.S. economy into 2026
and additional reductions in the Federal Reserve’s (Fed) policy rate. A crucial factor here is that
we expect the Fed to be easing policy while other major central banks are in neutral or tightening
mode to some degree. This implies a lessening in the appeal of the USD via the erosion in “U.S.
exceptionalism” (relatively higher rates of economic growth and more attractive yields) that has
been a pillar of USD support through its extended bull cycle.
Our forecast anticipates a slow process of monetary easing in the next few quarters, pushing the
Fed funds target rate to 3% by the end of this year. The highest “pain” point for the USD may
come in Q2/Q3 (coincidentally the period when the USD generally underperforms), once a clearer
picture of the state of the U.S. economy has emerged following the government shutdown and
the scale of the slowing U.S. labour market can be better assessed. USD losses could accelerate
if fundamental developments bolster the Fed doves’ case for more aggressive easing. The USD
will also be sensitive to the degree to which the Fed leadership transition alters the outlook for
policy, if at all. Additional headwinds for the USD are likely to emerge from weak structural factors,
(such as fiscal and external balances).
The weak USD undertone that emerged early in 2025 moderated through the second half of the
year, but the dollar index (DXY) still fell around 10% over the course of the year. A consecutive
down year in 2026 would be a little unusual by recent standards but not entirely uncommon,
particularly if the long-run bull trend in the USD is reversing.
USD weakened against global peers in 2025
115
3%
110
105
2%
100
95
1%
90
85
2021
0%
2022
DXY dollar index - LHS
2023
2024
2025
U.S. 2y OIS spread, DXY-weighted - RHS
Bloomberg Finance LP, Scotia Wealth Management
We are cognizant of risks that could support the USD, particularly as a weaker USD is developing
into the consensus view that leaves our forecast exposed to the potential of a contrarian move.
But stronger than expected U.S. macro-economic factors that preclude significantly easier Fed
monetary policy or weaker growth in Europe and Asia that renew pressure for easier monetary
policy could clearly subvert the negative USD perspective. Moreover, the outlook is fraught with
uncertainties centering mainly on how President Trump’s desire to rebalance global trade will
impact investor behaviour and currencies.
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