Global FX: US dollar at risk of a sustained decline
Key themes and risks driving currency markets.
The US dollar DXY index has essentially marked time over the past month, trading an extremely tight range between 98.6 and 97.5 with the low seen last week. Of note, this range sits below the 10-year average of 98.5, signalling a growing unease about the outlook for the US economy.
To us, it is fitting that the US dollar has found some stability around the 10-year average as, to date, the loss of momentum in job creation has been consistent with the stalling out of economic growth not recession. Further, as detailed on page 17 September’s Market Outlook, this turn in the labour market could be as much about the loss of labour supply as demand, with President Trump’s reforms clearly having an effect on migrant worker availability.
It is important to highlight though that this policy is not just an impediment for growth today but also an issue into the medium-term. Limited access to workers with the right skills and experience will, all else equal, hold up wage rates and create capacity concerns, capping activity growth.
To stoke GDP growth back to or above trend, substantial easing will be required. Arguably this is why the market has a further 150bps of rate cuts priced in by January 2027, a move that would take the fed funds rate back to a ‘neutral’ 3.00%. Against around 50bps of easing in Australia, Canada and the UK (all market expectations) and with the ECB’s easing cycle almost done, pricing for the policy rate outlook is firmly against the US dollar.
In such circumstances, it is difficult for the elevated inflation the US economy currently faces to counterbalance the weight of immediate growth and policy expectations. Instead, the way this is shaping the steepness of the curve is creating an additional medium-term headwind as it feeds through to mortgage interest rates and suppresses housing investment.
We see greater risk to inflation and therefore to the chance of a more measured policy easing in coming months. But this comes at the cost of more persistent weakness in growth and fiscal uncertainty further out.
This leads us to expect the US dollar DXY index to slowly retreat to roughly halfway between its 10-year and 20-year averages, respectively 98.5 and 90.3, with a low of around 93.5 forecast for the second half of 2027.
Underlying this trend decline are steady gains for EUR/USD, from USD1.17 today to USD1.20 end-2026 and USD1.21 end-2027, and for GBP/USD, from USD1.36 currently to USD1.38 end-2027.
The US dollar should also lose ground consistently against the weak Canadian Dollar and Japanese Yen; we forecast from CAD1.38 to CAD1.29 and JPY147 to JPY131. However, the uncertainties each of these nations face mean future appreciation against the US dollar is not assured. Other Asian currencies are expected to see varied outcomes based on their starting valuations and the spectrum of risks each nation faces.
Being a safe-haven of sorts and at the heart of regional manufacturing, Singapore’s dollar has already rallied strongly, USD/SGD moving from SGD1.37 in January to SGD1.27 in June, now holding at SGD1.28. Over the past twenty years, the only period the Singaporean dollar has been materially stronger than today was between 2011 and 2014, when it (briefly) neared SGD1.20. That was a time when the fed funds rate was at the lower bound and Chinese growth was above 7% – circumstances that are unlikely to repeat. Still, conditions favour a further move to around SGD1.26 by end-2027.
China’s Renminbi is becoming a stronger prospect versus US dollar as markets recognise that China has diversified its export base away from the US (see page 15 of Market Outlook), is passively reducing its US dollar exposure, and as downside risks for the economy recede. From CNY7.12 today, we look for USD/CNY to move to CNY6.90 at end-2026 and CNY6.50 by end-2027. If China’s authorities expedite additional stimulus while the US is weak over the coming year, the Renminbi could appreciate further. That said, the average of the decade prior to the pandemic was CNY6.50, making it a challenging level to break.
It is important to emphasise though that we do not expect this bilateral appreciation to materially reduce China’s competitiveness in Asia as gains against the US dollar are expected across Asia and to follow Euro/Sterling appreciation.
In part this is due to the lingering fears financial markets have over risks to China’s outlook. Economic developments also support China’s Renminbi trading in line with other major Asian currencies, however. This is because China remains in the middle of a multi-decade build-out of production and logistics outside its borders. Doing so requires the investment of considerable financial capital in other jurisdictions as well as a comparatively aggressive approach to market competition as capacity comes online. The net effect is an outflow of capital and a slow normalisation of today’s outsized trade surplus, trends that will hold back the Renminbi for a time.
India meanwhile finds itself in a challenging situation. The underlying growth potential of the economy justifies a marked appreciation, which is factored into our baseline profile. However, facing an outsized tariff for exports to the US and having to compete with the likes of Indonesia and Vietnam for capital investment by China and South Korea, the timing and scale of appreciation is at material risk.
This analysis first appeared in Westpac Economics’ September Market Outlook
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