Unlike emerging markets where pro-cyclical trades are crowded, positioning data shows the bearish US dollar view is not widely held in G10 currencies. This lack of a broad consensus short means there is less risk of a sharp deleveraging, giving pro-cyclical G10 FX more room to appreciate against the dollar.

Despite an equity rotation story away from the US that should support a weaker dollar, the currency is overshooting. This discrepancy is attributed to geopolitical uncertainties related to Iran. Without this risk premium, the dollar would likely already be weaker, indicating underlying bearish pressure on the currency.

Despite short-term gains, the conflict has weakened the dollar's medium-term outlook by re-igniting US fiscal concerns, raising the risk of Gulf countries repatriating assets, and incentivizing investors to increase their FX hedge ratios on US equity portfolios due to the dollar's underwhelming safe-haven performance.

J.P. Morgan's 2026 outlook is "Bearish Dollar, Bullish Beta," favoring pro-cyclical and high-yield currencies. They expect the dollar's decline to be smaller and narrower than in 2025 unless US economic data significantly weakens, shifting from the more aggressive bearishness of the previous year.

The U.S. dollar's decline is forecast to persist into H1 2026, driven by more than just policy shifts. As U.S. interest rate advantages narrow relative to the rest of the world, hedging costs for foreign investors decrease. This provides a greater incentive for investors to hedge their currency exposure, leading to increased dollar selling.

Despite conditions that typically strengthen the US dollar (rising oil prices, war), its recent performance has been weak. This suggests a structural erosion of its safe-haven status and global dominance, potentially due to declining use in global trade, which has long-term inflationary implications for the US.

The combination of restrictive trade policy, locked-in fiscal spending, and a Federal Reserve prioritizing growth over inflation control creates a durable trend toward a weaker U.S. dollar. This environment also suggests longer-term bond yields will remain elevated.

Instead of directly shorting the US dollar, which can be costly, traders can use the Canadian dollar (CAD) as a more profitable proxy. This approach offers a better "carry" advantage due to interest rate differentials, while still capturing the downside of a weakening USD, especially as the Bank of Canada's policy mirrors the Fed's dovishness.

Prolonged energy price shocks from the Iran conflict create a stagflationary environment. This enhances the US dollar's appeal as a defensive asset, especially as government bonds fail to hedge risk, forcing a shift from a previously bearish stance.