What reasons could potentially cause the unexpected appreciation of the US dollar next year in 2026? Pay attention to the possibility of a phase reversal in the economic rhythm in the third and fourth quarters.

Guolian Minsheng released a research report stating that the US dollar is expected to remain in a weak cycle next year, but it may not be as bad as expected: the main concerns at the beginning of the year are the cautious comments on easing by the new Federal Reserve chairman nominated by Trump, while in the second half of the year, attention should be paid to the phase of strength and weakness transition in the economic performance of the US and non-US economies. During this period, it is also necessary to pay attention to the independence of the Bank of Japan and the phase of fiscal concerns in heavily indebted European countries such as France. The main points of Guolian Minsheng are as follows: In recent years, it has been easy to make mistakes when looking at the trend of the US dollar for the next year at the end of the year. Taking the example of last year's end, after Trump unexpectedly won and returned to the White House, the market sentiment was euphoric. Under the guidance of an overheating economy and expectations of rising inflation, most people believed that the US dollar would remain strong. However, this year, the US dollar peaked in January and fell by more than 10% during the year. If we judge at the end of this year, a weak US dollar is likely to be the basic situation next year. What reasons could cause the US dollar to unexpectedly appreciate next year if it is expected to be weak? Why does the market believe that the US dollar will be weak next year? Without the halo of exceptionalism in the US, the market will objectively evaluate the relationship between the US and non-US: First, the US monetary policy is likely to become more relaxed, leading to a narrowing of interest rate differentials between the US and major non-US developed countries, causing the US dollar to depreciate. This does not seem to be an unsubstantiated statement at present. The Japanese Prime Minister has already openly adopted a loose fiscal policy, and in order to counter inflation risks, the Governor of the Bank of Japan, Haruhiko Kuroda, has made hawkish comments, causing the market expectation of a December rate hike by the Bank of Japan to surge; in the background of possible fiscal expansion in Europe, the European Central Bank is also cautious about lowering interest rates. On the other hand, the possibility of major relaxation in the US next year seems to be the greatest. Trump continues to guide expectations of interest rate cuts; Kevin Hassett, the leading candidate for Federal Reserve chairman in the current competition, is also a "follower" of low interest rates. Secondly, European, especially German, fiscal strength may lead to a strengthening euro. Although US fiscal policy may also be relatively positive next year, foreign exchange market pricing logic often focuses on the "strengths and weaknesses of marginal policy changes": on the one hand, the adjustment of German fiscal policy has a stronger turning point significance; on the other hand, the US government debt burden is significantly higher than Germany's, and if the scale of future fiscal deficits continues to expand, it may negatively impact expectations for its currency credit. The third is the resilience of non-US economies. From the perspective of the economic cycle, the main competitors of the US dollar, such as Germany and Japan, are still in the stage of continued economic recovery, while the US is still in a period of tightening policy, with diminishing economic growth potential. In addition, due to domestic inflation pressure, the White House may further adjust tariff levels downward, which will not only ease pressure on non-US economies, but also lead to further deterioration of the US fiscal position. What are the "loopholes" in the above macro logic? First is the issue of the pace of monetary policy. US easing may not necessarily come as quickly as expected, and the resolve of non-US, especially Japan, to tighten policy may not be as strong. Expectation gap in the US: first relieve inflation concerns. The bank has argued in previous reports that the core of US economic policy next year will revolve around votes, addressing voters' pain points - the issue of servicing crises, which involves both burdens and income. Therefore, one of the primary tasks of Trump's policy is to alleviate inflation and reduce the burden on residents. This means that even if Hassett may become the new Federal Reserve chairman, he may be cautious in his stance on easing, to prevent rapid inflation. The independence of the Bank of Japan is facing a test. As a follower of Abenomics, Japan's Prime Minister Sanae Takaichi is unlikely to forget former Prime Minister Shinzo Abe's threat to amend the Bank of Japan Law for monetary easing at the beginning of his term, as well as the fact that then-Governor of the Bank of Japan, Masaaki Shirakawa, resigned. In order to respond to external pressures, she also needs the support of domestic public opinion and policies, so Takaichi, who advocates loose monetary policy, may intervene in the independence of the Bank of Japan to prevent excessive tightening. As for the European Central Bank, the current market expectations may be the best case scenario: for example, expectations of successful fiscal expansion in the euro area next year, easing tensions between Russia and Ukraine, and the European Central Bank's monetary policy remaining unchanged. Secondly, it is still inevitable to avoid fiscal issues. Europe is not just Germany, other major countries such as France and Italy have government debt burdens as a proportion of GDP that are comparable to the US. Therefore, the bank expects that among the countries in the eurozone, only Germany may significantly expand its fiscal policy, while high-debt countries like France and Italy will continue to pursue neutral or even tighter fiscal policies. But what if other European countries outside Germany cannot contain themselves? A typical example is France, where fiscal consolidation faces challenges: on one hand, the ruling party is losing its grip in parliament due to the issue of deficit reduction, with four changes in prime ministers in two years; on the other hand, the presidential election in early 2027 will also be a critical year for party maneuvering. If fiscal consolidation in high-debt countries like France does not go well, leading to an increase in the yield spread with German bonds, it could be a significant catalyst for a weakening euro and a rebound in the US dollar. Another issue is the economic resilience of non-US economies. This is a relatively complex issue. While it is undeniable that Japan and Europe are currently in favorable positions in terms of the economic cycle, it does not mean that they will lead throughout the coming year, and the pace of the Chinese economy is also crucial. The bank believes that if the Chinese and European economies can both trend upward next year, the path of US dollar depreciation may be relatively smooth. Otherwise, there may be setbacks and fluctuations. The bank especially emphasizes the need to pay attention to the third and fourth quarters of next year, as there may be phase reversals in economic momentum. The US economy may rebound. In order to address the mid-term elections in the fourth quarter of next year, the bank believes that the second or third quarter of next year may be a key time window for the White House to rescue or solidify public opinion. The bank expects there may be greater fiscal subsidies and interest rate cuts, meaning that the performance of the US economy in the second half of the year may be better than the first half. On the other hand, non-US economies may experience the opposite rhythm. For example, under the theme of a "cross-cycle", the rhythm of the Chinese economy next year may be similar to the "high before and low after" pattern of the past few years; although Europe has fiscal support, it will also be affected by the Chinese economy and the previous appreciation of the exchange rate. Risk warning: escalation of conflict between Russia and Ukraine; unexpected downturn in the European economy; worsening US debt risk.