Rhythmic Reasoning_Full Report_Final_EN - Flipbook - Page 17
RHYTHMIC REASONING | TEMPO, TIMING AND TUNING
F O R E I G N E XC H A N G E O U T LO O K
Shaun Osborne
Managing Director & Chief Currency Strategist
3Q25
4Q25f
1Q26f
2Q26f
3Q26f
4Q26f
USDCAD
1.39
1.34
1.32
1.32
1.28
1.28
EURUSD
1.17
1.16
1.18
1.18
1.22
1.22
GBPUSD
1.34
1.40
1.43
1.43
1.48
1.48
USDJPY
148
135
132
132
125
125
USDCNY
7.12
7.20
7.15
7.10
7.10
7.10
USDMXN
18.31
19.26
19.45
19.64
19.84
20.06
USDCOP
3921
4,156
4,162
4,143
4,162
4,181
USDCLP
962
890
880
870
870
870
USDPEN
3.47
3.56
3.64
3.61
3.60
3.60
The surprisingly weak July Non-Farm Payroll data triggered a sharp
fall in U.S. yields and prompted markets to revise the outlook
for the Fed policy rate, weighing on USD sentiment. More weak
labour market data (and significant downward revisions to prior
reports) alerted investors to the risk of more aggressive rate cuts
over the balance of this year and into 2026. Pressure from the
U.S. administration for lower interest rates has also weighed on
USD sentiment and the White House’s manoeuvring around the
make-up of the FOMC has only added to market worries about the
potential infringement on Fed policy independence that changes
to the policy-making body might imply.
Fig. 1: After a rough first half of 2025, the
USD has stabilized from around mid-year
Source: Scotia Wealth Management, Scotiabank GBM Foreign Exchange
Strategy forecasts dated September 11, 2025, Bloomberg Finance LP.
KEY CONCLUSIONS
•
•
•
Currency markets have tended to consolidate through midyear, allowing the USD to stabilize against our expectation for
dollar weakness to extend.
Despite the stabilization in the USD through mid-year,
we remain bearish on its outlook and maintain forecasts
anticipating moderate losses over the balance of this year
and more weakness through 2026.
The prospect of a significantly lower policy rate, weak fiscal
policy settings, and slower economic momentum stand
among a litany of challenges facing the currency.
Back in the summer, we had expected the rapid sell-off in the U.S.
dollar (USD) to extend further. Instead, currency markets tended
to consolidate through mid-year, allowing the USD to stabilize.
Some relaxation in trade tensions (after the U.S. reached a trade
deal with the European Union, for example) allowed an oversold
USD to strengthen in July and gains extended through to early
August until the release of a surprisingly poor U.S. labour market
report checked its rise and effectively—it now seems—mark the
high point of the USD recovery. Despite the stabilization in the USD
through mid-year (Fig. 1), we remain bearish on its outlook and
maintain forecasts anticipating moderate losses over the balance
of this year and more weakness through 2026 amid a litany of
challenges facing the currency and the U.S. economy.
Bloomberg Dollar Index BBDXY
% since start of the year
15%
10%
5%
0%
-5%
-10%
-15%
Jan
Min
Mar
Max
May
2024
Jul
2023
Sep
2022
Nov
2025
15yr avg
Source: Bloomberg Finance LP, Scotia Wealth Management
Scotiabank recently revised its outlook for the Fed to include more
easing this year and a drop in the Fed funds target to 3.00% next
year. The White House thinks the policy rate should be much lower.
While the Fed policy easing cycle appears likely to extend further
in 2026, other core major central banks look increasingly poised
to move to neutral or, in the case of the Bank of Japan (BoJ),
tighten interest rates modestly. Interest rate spreads have moved
against the USD over the past few weeks but are likely to compress
further, undercutting the attractiveness of the USD (Fig. 2). We
also expect trade policy to contribute to heightened uncertainty
and slower U.S. economic momentum this year and next, meaning
growth differentials between the U.S. and Europe as well as Asia
should also narrow. Reduced growth and yield advantages will
erode the notion of “US exceptionalism” that helped launch and
sustain the USD on its elongated bull run following the 2007/2008
U.S. financial crisis.
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