1. The Federal Reserve’s Transition to Measured Easing
The Federal Reserve’s pivot toward a shallow easing cycle remains a central driver of FX markets. Forecasters expect 2–3 rate cuts in 2026, contingent on continued disinflation and cooling labor-market data.
- Key Points: Expected 2–3 quarter-point rate cuts in 2026. Timing remains data-dependent, especially around inflation and wage trends.
- FX Implications: Reduced U.S. yield premiums support moderate USD softening. Emerging Markets FX benefits selectively, with sensitivity to U.S. data upside risks.
2. The U.S. Dollar Outlook: Gradual, Not Aggressive Softening
The dollar is expected to weaken moderately as rate differentials compress. Structural supports—equity inflows and global liquidity demand—limit downside risk, resulting in a measured, rather than sharp, decline.
Reversal risks remain; sticky inflation could re-ignite yield premiums. Currently, the correlation between real yields and the USD remains high, though less rigid than pre-2024. Euro-bloc currencies stand to gain, while high-beta Emerging Markets currencies remain vulnerable to yield spikes.
3. U.S. Equity Strength and Its Indirect FX Impact
Major banks project the S&P 500 to reach new highs in 2026, driven by AI-enabled earnings strength and a benign rate environment.
S&P 500 Projection (2026)
7,500 – 8,000
Driven by AI-enabled earnings
FX Interpretation: Strong equity performance generally correlates with risk-on flows into high-growth Asian currencies like INR, KRW, and TWD. However, weak earnings or valuation compression could re-strengthen the USD.
4. China’s Moderate Reacceleration and Its Importance for Asian FX
China is forecast to grow around 4.8–5.0% in 2026, supported by targeted fiscal measures and improving export momentum. Export-oriented sectors are stabilizing, though broad stimulus remains limited and property-sector fragility continues to represent a downside risk.
New Trade Reality for Asian Exporters: Uneven Tariff Exposure
A major shift shaping Asian FX is the restructuring of U.S. tariff policy. Tariff differentiation has fragmented regional competitiveness:
- Altered Supply Chains: Routing changes to mitigate localized tariffs.
- Uneven Pressure: Export-heavy economies face varying duty rates.
- FX Dispersion: Divergence in currency performance based on specific trade exposure.
FX Interpretation: The RMB still anchors regional currency movements, but tariff divergence drives additional volatility. ASEAN currencies exhibit varied performance depending on sector-specific tariff treatment.
5. Oil Market Outlook for 2026: Relief for Importers
The U.S. EIA projects Brent crude prices to moderate, supported by steady non-OPEC supply and tempered global demand.
Brent Crude Forecast (2026)
Mid-$50s
Implications: Relief for India, Japan, Eurozone
FX Implications: Relief for major importers (India, Japan, Eurozone). Reduced inflation pass-through improves policy flexibility. Petrocurrencies face downside risk unless producers adjust output.
6. Global Monetary Policy Divergence
A defining characteristic of 2026 is that Central banks are diverging in policy paths based on domestic conditions, creating distinct winners and losers.
→ Modest USD Softening
→ Stabilizing EUR
→ Rising JPY Support
→ Tech-cycle Strength
→ Sensitive to capital flows (Outflow risks for IDR, THB)
Implications: Structural increase in Emerging Markets FX volatility due to carry trade unwinding and capital reallocation.
Frequently Asked Questions
Consensus expectations point to 2–3 cuts, contingent on labor data.
No. Expect a mild drift lower, not a trend reversal.
Growth near 5.0% helps stabilize regional trade flows, but property risks limit upside.
Soft demand and resilient supply keep Brent crude range-bound.
Tariff differentiation has fragmented regional competitiveness, increasing FX dispersion.