Deep adjustment of the US dollar system: restructuring of asset allocation logic under the depreciation expectation in 2026

From the strong dollar to the arrival of the strategic depreciation turning point

At the end of 2025, the global foreign exchange market is undergoing a silent yet profound paradigm shift. The US Dollar Index (DXY) has fallen below the critical psychological level of 99 after an annual decline of 8.8%, marking the weakest start to a year since the mid-1980s. Leading international institutions such as Morgan Stanley, UBS, and Pictet Asset Management are sounding alarms: in 2026, the dollar may face a deep adjustment cycle, with DXY potentially hitting 94 or even lower in the first half of the year. This assessment is not based on short-term emotional fluctuations, but rather rooted in a combination of factors including structural weakness in the US labor market, a shift towards accommodative monetary policy, pressures on fiscal sustainability, and global capital rebalancing.

This article aims to strip away market noise, systematically organize the logical chain of institutional forecasts, analyze the macroeconomic dynamics behind the depreciation of the US dollar, and prospectively assess its far-reaching impact on emerging markets, gold, cryptocurrencies, and other asset classes, creating a configuration framework optimized for risk-reward ratios for investors.

1. Institutional Forecast Panorama Scan: A Map from Consensus to Divergence

1.1 Morgan Stanley: Precise Calculation of the 94 Level and Rebound Path

Morgan Stanley's G10 FX Strategy team provided the most detailed outlook on the US dollar's trajectory in its 2026 Annual Outlook. The bank predicts that the DXY will fall to 94 in the first half of 2026—this level is not only the historical low point from September 2022 but also corresponds to the fair value midpoint of the US-Japan real interest rate differential. Subsequently, as the US economy shows relative resilience, the index is expected to rebound to 99 by the end of the year.

Three core driving factors of bearish 94:

• Interest Rate Spread Convergence Mechanism: After the Federal Reserve enters the interest rate cut cycle, the US-Euro 2-year interest rate spread is expected to narrow by 60-80 basis points, directly weakening the attractiveness of dollar arbitrage.

• Fiscal Rebalancing Pressure: The Congressional Budget Office (CBO) estimates that the federal deficit rate for FY 2026 will still be above 5%. The marginal demand from foreign capital is weakening, necessitating a "subsidy" for buyers through the depreciation of the dollar.

• Position congestion risk: CFTC data shows that the net long position in USD is at a five-year high. Once the interest rate cut expectations materialize, the long positions being liquidated will amplify the devaluation inertia.

The momentum rebounds to 99 at the end of the year:

• Economic growth differentiation: After the interest rate cut, the growth rate of the US economy may still be higher than that of the Eurozone and the UK, attracting long-term capital inflow.

• Yen arbitrage trading resumes: If the Bank of Japan maintains its ultra-easy policy, carry trades will indirectly boost demand for the US dollar.

• Technical support effectiveness: The 94-95 area serves as a long-term uptrend support line for the US dollar, and technical investors may position themselves on dips.

1.2 UBS and Pictet: Extreme Predictions of Structural Pessimism

UBS's Chief Investment Office has downgraded the dollar rating to "unattractive," with its high-net-worth clients accelerating the withdrawal from dollar assets in favor of gold, cryptocurrencies, and Chinese assets. The bank's strategists noted that investors may adopt a "sell the rallies" strategy, meaning any technical rebounds will be seen as an opportunity to reduce positions.

Luca Paolini, a strategist at Pictet Asset Management, predicts that the DXY will fall to 95 by the end of 2026. The logic behind this is that the slowdown in U.S. economic growth will eliminate inflationary pressures, while improvements in economic growth in Europe and Japan will narrow the interest rate differentials between the U.S. and Europe, as well as between the U.S. and Japan, while the dollar remains overvalued.

More aggressive predictions come from Morgan Stanley's individual scenario analysis, suggesting that if the core PCE inflation in the United States falls below 3% and interest rate cuts exceed expectations, the DXY may drop as low as 89, corresponding to about a 10% depreciation.

1.3 Market Pricing and Institutional Discrepancies: Trading Opportunities in Expectation Gaps

The current market has priced in a low point of a 3% rate cut by the Federal Reserve in 2026, but there is significant disagreement among institutions.

• JPMorgan: Expects only one rate cut, believes sticky inflation will limit policy space.

• Goldman Sachs: Predicts two more rate cuts in 2026, each by 25 basis points.

• Morgan Stanley: Expects a 175 basis point rate cut, supporting its 94 target

This expected difference constitutes the margin of safety for the dollar short strategy. If economic data is weaker than expected, dovish pricing will be further reinforced; even if the data is strong, the current positions have partially reflected the tightening expectations, and the downside risk is limited.

2. The Deep Macroeconomic Logic of Dollar Depreciation: From Cyclical to Structural

2.1 Paradigm Shift in the Labor Market

The unemployment rate in the United States rose to 4.4% in 2025, reaching its highest level in nearly four years. A deeper issue is the contradiction between stagnant labor participation rates and slowing wage growth. The ADP employment report has frequently fallen short of expectations, indicating a weakened ability of the private sector to create jobs. This weakness is not a cyclical fluctuation, but rather the cumulative result of structural factors such as an aging population, tightening immigration policies, and skill mismatches.

The cooling of the labor market has directly weakened the fundamental support for the US dollar. Traditionally, strong employment data supports consumer spending and economic growth expectations, attracting capital inflows. When this pillar weakens, the appeal of the dollar as a safe-haven asset naturally declines.

2.2 The Dovish Turn of Monetary Policy and Credibility Game

The Federal Reserve faces not only economic pressure but also institutional challenges. Although the Trump administration cannot directly remove Powell, it has substantially influenced market expectations of the Fed's independence through "shadow chair" nominations and public pressure. This political tendency may weaken the effectiveness of the Fed's forward guidance and increase market volatility.

From the perspective of policy pathways, the Federal Reserve is highly likely to implement a 175 basis point rate cut in 2026. This would bring the federal funds rate down to near neutral levels (with market consensus at 3%-3.5%). However, the key question is whether the rate cut can effectively stimulate the economy or fall into a "liquidity trap." If inflation expectations spiral out of control, real interest rates may rise instead of falling, exacerbating the pressure on the dollar.

2.3 Fiscal Sustainability and "Depreciation Subsidy" Mechanism

The U.S. debt-to-GDP ratio has exceeded 120%, and the CBO projects that the deficit rate will still be above 5% in the fiscal year 2026. In the context of high debt, a moderate depreciation of the dollar has become an implicit debt restructuring tool. Through depreciation, the U.S. relatively reduces the burden of its debt denominated in its own currency while "subsidizing" foreign buyers with the depreciation, maintaining the marginal demand for U.S. Treasuries.

This "devaluation subsidy" mechanism, while effective in the short term, may undermine the credibility of the US dollar as a global reserve currency in the long run. UBS clients are turning to gold and cryptocurrencies as a response to this mechanism. #美元指数 Federal Reserve rate cuts #避险资产 emerging markets #加密货币# growth value lottery to win iPhone 17 and peripherals ##十二月降息预测 #反弹币种推荐