USD selloff looks set to continue into second year

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12-01-2026 14:26

USD selloff looks set to continue into second year

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USD selloff looks set to continue into second year

The US dollar’s large-scale selloff appears likely to extend into a second consecutive year, reinforcing expectations of continued pressure on the currency in 2026 after its weak performance in 2025.

Last year, the dollar fell 9.4% versus G10 currencies, according to the DXY index, marking the second-largest annual drop in the past two decades.

Strategists at Bank of America reviewed historical episodes most comparable to the current cycle and found that in four of the five closest analogs, the dollar’s weakness persisted into the subsequent year.

Across all the key analogs, the US currency typically showed deeper declines in the second year of the cycle. The average across the five most relevant historical examples points to an additional weakening of the dollar of roughly 8% in 2026.

The 1995 episode stands out as particularly instructive for current conditions. Then, the US economy was experiencing technology-driven growth, a so-called soft landing, and the Federal Reserve cut interest rates in the second half of the year.

In 1995, the dollar weakened by 4.2%, a performance near Bank of America’s current projection that the DXY could decline to about 95 in 2026.

By contrast, 2018 is an outlier among the analogs, when the dollar strengthened amid Fed rate hikes, US-China trade tensions, and weak growth in the eurozone.

Despite a modest recovery for the dollar in late 2025, analysts note that the currency remains in a broad downtrend versus G10 peers. Global equity markets have begun 2026 outpacing US stocks.

Strategists say this dynamic should be watched closely, as equity flows and related hedging activity could represent a key ongoing bearish factor for the US dollar next year.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

Forex humour