Westpac Forecasts a Weaker Dollar Amid Global Economic Shifts

Westpac has indicated that the outlook for the dollar is leaning towards a decline, suggesting that risks are predominantly negative.

Looking forward, U.S. economic growth is anticipated to exceed the trend in 2026, largely driven by consumer expenditure and technological investments. Despite this positive forecast, inflationary pressures are expected to persist, with only one potential rate cut remaining from the Federal Reserve.

In contrast, the euro and pound are predicted to outperform, potentially reaching values of $1.22 and $1.41 respectively by mid-2027. Additionally, currencies in Asia, particularly the renminbi, are also projected to gain strength.

Westpac noted that while it maintains a generally optimistic view on the U.S. economy, it foresees a gradual weakening of the dollar over the next 12 to 18 months. The dollar had an uptick from $97.9 at the end of December to $99.4 by mid-January, but sharply declined to its lowest point in about four years at $96.2. It is now hovering around 97.0, which is roughly 15% below its peak from mid-2022 and about 1.5% lower than its 10-year average. Westpac believes the dollar will stabilize between its current value and its 20-year average, but acknowledges that the downward risks are significant.

It’s worth noting that Westpac is not pessimistic about the U.S. economy. They expect growth above trends to persist into 2026, driven by strong consumer spending and ongoing investments in technology infrastructure. The report forecasts that wage growth will outstrip inflation, and the labor market will essentially remain at full employment.

That said, Westpac emphasizes that inflation risks remain elevated. Concerns like capacity limitations in housing, transportation, energy, and healthcare, along with the delayed effects of tariffs, will likely keep price pressures above the Federal Reserve’s 2% target. This aligns with the predictions from the Federal Open Market Committee, which foresees just one additional rate cut—more cautious than the market’s current expectation of at least two cuts this year.

So, why the softening outlook for the dollar? Westpac attributes it to more promising opportunities abroad. The report claims that growth potentials in Europe and Asia are increasingly shifting towards structural advancements rather than trade uncertainties, while the strong performance in U.S. equities may limit further relative gains.

Looking ahead, Westpac anticipates the euro to rise to $1.22 and the pound to $1.41 by mid-2027. They also expect a moderate appreciation of the Canadian dollar and yen, as well as continued strengthening of the renminbi amid improving growth outlooks in Asia.

• USD/CAD is anticipated to ease to 1.34 by mid-2027 and further to 1.30 by mid-2028
• USD/JPY expected to be at 145 by the end of 2026 and 139 by mid-2028
• USD/CNY likely to rise towards 6.35 over the next two years