RBC's 6-12 Month View on USD - FJElite

The medium-term case for USD weakness remains compelling, driven by two primary arguments. First, there is an expectation of asset diversification, which drives a passive reallocation away from the US. This is a very long- cycle driver and may need several years to pan-out. Second, is the cost-of-hedging argument as Federal Reserve rate cuts beginning in 2025 are expected to increase equity and rates hedge ratios for foreign investors. We expect this theme to continue to gain momentum into 2026.
 
Long-term, the trade-weighted USD has depreciated by 8% in 2025. Typically, USD weakening cycles see the USD depreciate by 40% before stabilizing. These long-term trends are rooted in structural asset allocation shifts rather than short-term market fluctuations, reinforcing the idea that the USD's depreciation is a multi-year process driven by fundamental factors and diversification needs.