The dollar's decline, particularly in April, was not driven by investors divesting from US assets. Instead, it was caused by investors with large, unhedged dollar exposures belatedly adding hedges. This involves selling dollars in the spot or forward markets, creating downward pressure without actual asset sales.

While a major sell-off in AI stocks would likely cause an initial "knee-jerk" strengthening of the US dollar due to risk aversion, the subsequent focus would shift to the US's twin deficits, leading to a multi-year dollar weakening trend once volatility subsides.

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.

A series of upcoming US policy events, including Fed appointments and defense spending debates, are collectively skewed towards dovish monetary policy implications and a weaker fiscal picture. This creates a coordinated downside risk profile for the US dollar, suggesting potential for weakness is greater than for strength.

The classic "stocks down, dollar up" correlation is weakening. A J.P. Morgan model shows that relative US equity underperformance (dollar-negative) is currently offsetting the effect of an outright global equity decline (dollar-positive). This dynamic leads to only modest moves in the dollar despite stock market stress.

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.

Historical precedent suggests that in a positive growth environment, a geopolitical shock like a potential US-Iran conflict might not lead to a sustained risk-off rally in the US dollar. Markets may price out the risk premium quickly, allowing pro-cyclical trends to resume, as seen in a similar event last year.

The U.S. Dollar's value has been driven less by conventional factors like growth expectations and more by an unconventional "risk premium." This premium reflects market reactions to policy uncertainty, such as talk of FX intervention or tariffs. This has caused the dollar to weaken far more than interest rate differentials alone would suggest, creating a significant valuation gap.