Analysts expect a continued dollar-centric market where most G10 currencies move in tandem against the dollar, keeping dollar correlations high. However, they are bearish on cross-correlations (e.g., involving Sterling and Euro), anticipating greater divergence between non-dollar currencies, which presents an opportunity for investors.

J.P. Morgan maintains a constructive stance on the Eurodollar due to its asymmetric response to Fed pricing. The currency strengthens more when the Fed's terminal rate is priced lower but shows stickiness when it's priced higher, creating a favorable risk-reward profile for bullish positions despite lowered upside targets.

While persistent inflation and energy pressures make the US dollar less bearish than before the conflict, this is not enough to alter the medium-term negative forecast. The key is now to be more selective, implementing dollar-bearish views through carry-efficient strategies rather than broad bets against the currency.

A resurgence of "U.S. exceptionalism"—driven by strong inflation, labor data, and significant corporate earnings outperformance vs. Europe—is causing a major macro divergence. This has prompted J.P. Morgan to lower its EUR-USD targets and adopt a bearish outlook for the first time in a year, seeing any relief rallies as short-lived.

Despite a popular bearish narrative, the U.S. Dollar has a strong bullish case. The U.S. economy is accelerating while Europe and Japan face stagflation, and record short positioning creates fuel for a squeeze. The argument is that U.S. stocks are essentially levered U.S. dollars, and relative strength will attract capital.

A historical review places 2026 in the second-lowest decile for central bank rate activity (hikes/cuts). This data strongly suggests a contained FX volatility environment, as significant vol spikes historically occur only during periods of extremely high or low central bank intervention.

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.

Systematic growth momentum signals turning negative across a wide set of 28 countries acts as a powerful, counter-cyclical indicator. This broad-based global economic weakening points towards relative US dollar strength, providing a systematic justification for a long dollar position.

The 2026 outlook for government bonds and the US dollar is not a straight line. It's a tale of two halves, with an expected front-loaded rally (lower yields, softer dollar) by mid-year as the Fed cuts rates, before yields and the dollar drift higher into year-end.