U.S. Dollar Forecast: Outlook Remains Weak

By Sarupya Ganguly
BENGALURU (Reuters) – The U.S. dollar is expected to remain weak in the coming months, according to a Reuters poll of foreign exchange analysts. Concerns about rising U.S. debt, fluctuating tariff policies, and expectations of interest rate cuts play significant roles in this forecast.

Growing concerns regarding President Donald Trump’s inconsistent tariff strategies and a proposed tax-cut and spending bill projected to increase the national debt by $3.3 trillion have led to increased investor outflows from dollar-denominated assets in recent months.

Additionally, a notable rise in the “term premium,” or the compensation investors require for holding longer-term debt, has contributed to the dollar’s nearly 11% decline against a basket of major currencies this year, hitting a three-and-a-half-year low against both the euro and sterling last week.

Data from the Commodity Futures Trading Commission indicates that short-dollar trades are nearing a two-year high, suggesting further weakness might be imminent.

In a Reuters poll conducted from June 27 to July 2, over 80% of FX analysts (42 out of 52 respondents) expect current positioning to remain or for net-shorts to increase by the end of July. Over half of these analysts had previously anticipated a decline in the reserve currency’s “safe haven” appeal.

Jennifer Lee, a senior economist at BMO Capital Markets, stated, “We are expecting a weaker U.S. dollar in the coming months.” Lee attributes this to the recent budget, the inflationary effects of tariffs, and President Trump’s critical stance towards Federal Reserve Chair Jerome Powell, which negatively influences the fiscal outlook for the U.S.

Trump has pushed for immediate and significant rate cuts. Conversely, Powell reaffirmed the Fed’s intent to “wait and learn more” about the tariff impacts on inflation before making any rate adjustments.

Tariff Negotiations

When asked about the main driver for the U.S. dollar over the forthcoming months, nearly 37% of respondents (22 out of 60) cited “tariff negotiations.” Attention is now focused on Trump’s actions following the expiration of a 90-day tariff pause announced in early April.

Eighteen respondents pointed to “interest rate differentials,” which have recently been less impactful, given the euro’s rise despite the European Central Bank’s rate cuts and the Fed’s inaction this year. Thirteen mentioned “portfolio diversification,” reflecting a June survey suggesting almost 90% of FX strategists predicted declining demand for dollar assets. Seven indicated “debate over Fed independence” as a factor.

Currently, the euro is up nearly 14% this year and is on track for its best annual performance against the dollar since 2017. Analysts predict it will stabilize at $1.18 in six months and rise approximately 2% to $1.20 in a year based on median survey findings from 70 strategists.

About 70% of analysts upgraded their euro-dollar forecasts, reflecting the highest medians since September 2021. Many of these forecasts were made during a week when the euro gained nearly 3%, indicating potential for further upgrades.

Alex Cohen, an FX strategist at Bank of America, noted, “We continue to watch this slower burn story of real money and… a consistent selling of the dollar, particularly from European real money,” suggesting structural reasons for the dollar’s impending decline over the months to come.