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.

Investors have been holding unhedged US dollar assets to capture both high yields and currency appreciation, a speculative strategy traditionally used for emerging market local currency bonds. This parallel indicates a shift in risk perception, where US assets are no longer seen as a pure safe haven.

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.

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.

The firm's initial 2026 forecast shifted from bearish to bullish on the dollar due to US economic exceptionalism and yield supremacy, while maintaining a positive view on beta trades like FX carry. This dual-bullish stance is unusual and forms their core macro theme.

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.

Contrary to the historical norm where volatility rises with a strengthening dollar (risk-off), the market is now experiencing higher volatility as the dollar falls. This unusual 'dollar down, vol up' dynamic suggests a pro-cyclical market backdrop and has major ramifications for how FX options and risk reversals are priced.

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 conflict has shifted the FX regime from pro-cyclical to risk-off, making the US dollar attractive as a high-yielder, defensive asset, and energy exporter. Beyond the dollar, the primary theme is pairing energy exporting currencies (like AUD, NOK, BRL) against energy importing currencies (like EUR), which are most vulnerable.