Analysts at BofA Securities say the U.S. dollar could face further weakness in 2026. They note that several market-moving events in the final weeks of the year may influence the currency in different ways.
In a client note, strategists Alex Cohen and Adarsh Sinha said investors will face “a lot” to interpret before the Christmas holidays bring 2025 to an end. They warned that December is shaping up to be a busy month for markets, with a high concentration of risks that could affect the near-term dollar outlook.
One area of focus is the volatility in artificial intelligence stocks. Some concerns about stretched tech valuations and massive AI spending have eased, but traders are still watching the sector closely. BofA analysts said that while the dollar has shown a slightly stronger daily correlation with AI stocks, weekly trends often move in opposite directions. They described the connection as “inconclusive.”
Another key driver is the Federal Reserve’s upcoming interest rate decision in December. Expectations for a 25-basis-point rate cut at the December 9–10 meeting have surged. CME FedWatch now indicates an 87% probability of the move, up from about 40% the week before.
Recent U.S. economic data supports the case for lower rates. The labor market has weakened, with unemployment in September rising to its highest level in almost four years. Consumer confidence has also fallen to its lowest level since April. A Fed report pointed to slight declines in employment and more districts reporting hiring freezes.
Several important indicators for October and November have not been released due to the record-long federal government shutdown that ended last month.
Political developments may also influence the dollar. Reports suggest Kevin Hassett, a close ally of President Donald Trump, is the leading candidate to replace Jerome Powell when his term ends in May. Trump has repeatedly pushed for faster and deeper rate cuts to stimulate the economy.
BofA analysts said they see some upward risk for the dollar going into the Fed meeting. However, they expect more sensitivity from incoming data and the final choice of the next Fed Chair. They argued that a more dovish Fed over time “feels inevitable,” suggesting any dollar strength may be temporary, while dollar-negative outcomes could last longer.
Another potential catalyst is the upcoming U.S. Supreme Court ruling on Trump’s authority to use emergency economic powers to impose broad tariffs. If the court rules against Trump and orders tariff revenues to be refunded, it could increase concerns about the U.S. fiscal position. Investors may demand a higher risk premium for holding long-term debt, which could pressure the dollar lower.
Overall, BofA said the Supreme Court decision leans “negative” for the U.S. dollar, though the outcome remains highly uncertain.
