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.

Despite official statements against rapid currency depreciation in Japan and Korea, policymakers likely view a weaker currency as a beneficial stimulus. With negative output gaps and competition from China, the goal is not to reverse the trend but to manage its pace to avoid market disorder and US Treasury scrutiny.

While the idea of US growth re-acceleration is driving dollar strength, it's not the only story. Recent positive surprises in European PMI data and upgraded Chinese GDP forecasts suggest broader global growth resilience. This breadth should help cap the US dollar's rally and may promote weakness against other currencies.

The success of the current EM FX carry trade isn't driven by wide interest rate differentials, which are not historically high. Instead, the strategy is performing well because a resilient global growth environment is suppressing currency volatility, making it profitable to hold high-yielding currencies against low-yielders.

Despite a packed calendar of central bank decisions and key data releases, broad FX volatility is hovering near five-year lows. This suggests investors are underpricing potential market moves, and current options pricing for events like U.S. payrolls may be insufficient to cover a significant data surprise.

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.

The US dollar reached its peak global dominance in the early 2000s. The world is now gradually shifting to a system where multiple currencies (like the euro and yuan) and neutral assets (like gold) share the role of reserve currency, marking a return to a more historically normal state.

President Xi Jinping used a phone call with President Trump not just for bilateral issues, but to strategically signal displeasure with Japan's hawkish stance on Taiwan. This "shadow play" diplomacy shows China leveraging its relationship with the U.S. to indirectly manage and warn other nations, making the U.S. a channel for its geopolitical messaging.

Fed Chair Powell's hawkish tone caused a short-term dollar rally by pushing back on a December rate cut. However, the market has not fundamentally re-evaluated the Fed's terminal rate, suggesting the dollar's upward potential from this single factor is capped as the core long-term trajectory remains unchanged.