Citi: U.S. Dollar to Rebound in 2026
- Written by: Gary Howes
Image © BruceG1001, Flickr, reproduced under CC licensing
One of the world's biggest FX dealers says the dollar is set to outperform in 2026.
Citi's strategy team have "shown empirically" that USD hedging flows can explain a good amount of USD underperformance in 2025.
"Therefore, understanding these flows is a big input to understanding future path of the USD," explains a new summary note from Citi's strategy team.
"The jury is out on these flows continuing. But in the absence of more hedging, USD bears like us are left anticipating one more burst of cyclical U.S. economic weakness," it adds.
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Citi expects the U.S. "equity bubble to continue attracting inflows, so we believe 2026 looks well placed for a USD rebound."
However, analysts warn the turning point for the USD is not here yet.
"Given we are waiting for ‘peak dovish Fed, peak U.S. cyclical weakness’ before turning USD bulls, we have low
conviction on when that will be," say analysts.
Analysts have said a good part of USD weakness in 2025 comes from foreign investors in U.S. assets (like stocks) who hedged their dollar exposure, meaning they sold USD to protect against currency losses.
However, if U.S. stocks continue to outperform, then foreign investors will be less inclined to hedge their exposure.
Because Citi see the stock market rally continuing, they think investors will opt to buy into the USD on an unhedged basis, meaning the dollar rallies alongside equities.
