Dollar Outlook Turns Bearish: Deutsche Bank Predicts Prolonged Decline into 2026

Deutsche Bank expects the US dollar to weaken 6% by end-2026, driven by valuation, current-account deficits and monetary policy cycles.

Deutsche Bank Forecasts 6% Decline in the US Dollar by End-2026: What’s Driving the Weakening Outlook?

The US dollar is expected to enter a prolonged period of depreciation through the next two years, according to a newly released analysis from Deutsche Bank’s foreign-exchange strategy team. The bank forecasts the dollar will weaken roughly 6% on a trade-weighted basis by the end of 2026 as several key macroeconomic fundamentals shift against the currency.

The projection marks a notable inflection point, especially after the dollar maintained exceptional strength between 2022 and 2024 amid aggressive Federal Reserve tightening, elevated geopolitical risks, and strong relative performance of the US economy. But Deutsche Bank argues that this era of dollar dominance is fading.

The “Trump Shock” Has Passed — But USD Headwinds Remain

Deutsche Bank’s report notes that the “Trump shock” to the dollar — a period of heightened volatility surrounding US political risk — has now largely passed. However, the fading of this shock does not translate into dollar strength. On the contrary, several underlying structural indicators continue to point toward continued USD weakness.

The bank highlights three core drivers:

1. The Dollar Remains Overvalued Relative to Fundamentals

According to the bank’s valuation models, the USD is still trading above fair value versus major currencies including the euro and yen. Overvaluation typically leads to long-term corrective pressures, especially as global financial conditions normalize.

2. The US Current-Account Deficit Continues to Widen

The United States is experiencing a growing current-account deficit, reflecting persistently high imports, strong consumer spending, and increasing overseas investment flows.

Deutsche Bank calls this the most important indicator supporting a structural decline in the dollar over the next several years.

3. The Fed’s Monetary Policy Cycle Is Turning

After delivering the most aggressive tightening cycle in four decades, the Federal Reserve is widely expected to begin multi-year rate cuts between 2025 and 2026. Lower interest rates reduce the return on dollar-denominated assets, diminishing the currency’s attractiveness to global investors.

Combined, these factors suggest that US dollar exceptionalism is unlikely to continue into the second half of the decade.

EUR/USD Expected to Rise Toward 1.25 by Late 2026

One of Deutsche Bank’s clearest forecasts is for a sustained rise in the euro. The bank expects EUR/USD to reach 1.25 by the end of 2026 — a level not seen since 2021.

Several macro drivers are expected to support the euro over the next two years:

• Stronger Global Growth Outlook

The euro is a cyclical currency, meaning it benefits when global demand and trade accelerate. As global economic growth stabilizes and improves into 2025–2026, the euro could strengthen accordingly.

• A Cyclical Upswing in Europe

Recent economic indicators show that Europe may be emerging from the bottom of its growth cycle, with signs of recovery in both services and manufacturing sectors. A more synchronized cyclical rebound could push the euro higher.

• Europe’s Strong External Balance

Unlike the United States, the eurozone continues to run a consistent current-account surplus, providing a strong financial foundation for the currency. This structural advantage supports a medium-term appreciation trend.

Persistent Yen Weakness May Force Policy Shifts in Japan

The report also addresses the ongoing weakness of the Japanese yen, which has fallen to multi-decade lows during 2024–2025. Deutsche Bank notes that persistent inflation and further yen depreciation may force Japanese policymakers to tighten policy despite their reluctance to do so.

The Bank of Japan (BOJ) — which has been extremely cautious in exiting its ultra-loose monetary policy — may be compelled to move more aggressively if yen weakness threatens financial stability or fuels inflationary pressures.

Analysts across major institutions including UBS and Goldman Sachs have echoed this view, projecting that the yen may be one of the most volatile major currencies over the next two years as BOJ navigates the complex trade-off between inflation control and economic growth.

Chinese Yuan Appears Undervalued, With Potential for Real Appreciation

Deutsche Bank also highlights notable dynamics in China’s currency, stating that the Chinese yuan (CNY) appears undervalued based on its long-term equilibrium models. Low inflation, improving capital inflows, and China’s strategic focus on currency stability could all support a gradual strengthening of the yuan between 2025 and 2026.

The bank notes that a stable or firmer yuan may also be part of China’s broader effort to attract foreign direct investment and improve market confidence.

A Slower-Than-Expected Decline — But a Clear Downtrend for the USD

Although Deutsche Bank still expects the dollar to weaken by 6% by year-end 2026, the bank emphasizes that the pace of decline will be slower than previously forecast. Several supportive factors remain in place:

The Fed may keep rates elevated throughout 2024

Safe-haven demand for USD has not completely dissipated

US economic performance, while moderating, is still relatively strong compared to several regions

Nevertheless, the medium-term trajectory remains firmly bearish.

Conclusion

Deutsche Bank’s latest analysis signals a meaningful shift in the global currency landscape. With USD overvaluation, widening US current-account deficits, and a turning monetary policy cycle, the bank argues that the dollar is poised for a sustained decline through 2026.

In contrast, major currencies such as the euro, yen, and yuan are entering their own distinct economic cycles, creating new risks and opportunities for global investors.

As the world’s major economies move into the next phase of policy normalization, the foreign-exchange market may experience deeper structural changes — and the long-dominant US dollar could finally face a durable correction.

FAQs

1. Why does Deutsche Bank expect the US dollar to weaken by 6%?

Because of USD overvaluation, a deteriorating current-account position, and the upcoming shift toward lower interest rates from the Federal Reserve.

2. What is Deutsche Bank’s forecast for EUR/USD?

The bank expects EUR/USD to reach 1.25 by the end of 2026, supported by Europe’s recovery and strong external financial position.

3. Why is the Japanese yen under pressure?

Persistent inflation and slow BOJ policy normalization have weakened the yen, potentially forcing Japan to tighten policy in the coming years.

4. Is the Chinese yuan undervalued?

Yes. Deutsche Bank believes the yuan is undervalued and could experience real appreciation through 2025–2026.