Bank of China: Short-term bearish outlook, but the US dollar will make a comeback by the end of 2026.

The French Industrial Bank stated that although the US dollar will come under pressure in the short term, it will regain its strength in the medium to long term based on the relative advantage of the US economic fundamentals, achieving the "return of the king" for the US dollar. BNP Paribas pointed out that the weakness in US economic data, especially the weakening labor market data, is the core factor affecting the focus of the foreign exchange market. This weakness is offsetting the optimism brought by the AI revolution in the market, prompting the market to shift its focus to the possibility of significant interest rate cuts that the next Federal Reserve chairman may implement. The bank forecasted that due to the slowdown in US economic growth in the fourth quarter, the US dollar will face downward pressure in the coming weeks and at the beginning of 2026. However, in the medium term, the bank believes that the prospects of US economic growth will not deteriorate significantly, and the extent of deterioration will not exceed what the market has already digested. Unless there is significant fiscal tightening in the US, the downside potential for the US dollar will be limited. The bank emphasized a key contradiction: tightening fiscal policy together with loose monetary policy will undoubtedly weaken the US dollar, but loose monetary and fiscal policies are not sustainable in the long run. With market attention shifting from short-term interest rate fluctuations back to the medium to long-term growth fundamentals, the US dollar index is expected to rebound in the second half of 2026, with a year-end target of 100.2. Structural challenges for non-US currencies are difficult to overcome The euro and the yen, as major non-US currencies, face their own structural challenges. The euro against the US dollar is expected to test a high of 1.20 in early 2026 with the weakening of the US dollar, but this is more driven by external factors. Weak economic growth in the eurozone, aging population, and ongoing pressure from geopolitical conflicts make it difficult to sustain long-term strength. Once the US dollar regains momentum, the euro against the US dollar is expected to gradually decline, with a year-end target of 1.14, close to its average level over the past decade. The situation for the yen is more dire. As the worst-performing major currency in the past five years, the yen's real effective exchange rate has fallen by nearly 30%. Long-term low interest rates, mild inflation levels, and concerns about the sustainability of public debt have collectively suppressed the yen exchange rate. Although the Bank of Japan may initiate a rate hike cycle to provide temporary relief for the yen, the report believes that for the yen to achieve a fundamental turnaround, it will depend on Chinese policies, which is less likely in the short term.