US dollar should stay supported by strong US growth, high inflation, and a Fed threatening to tighten before weakening next spring as inflation falls. An AI correction looms large, and what about attractive overseas growth drawing funds away from the US dollar?
ING’s base call: Dollar stays supported until next spring
Our base call assumes that the Federal Reserve stays hawkish in the first quarter, as decent US growth and above-3% inflation keep money markets pricing in the threat of an extended tightening cycle. That turns in the second quarter, when energy-driven base effects drop out of headline inflation and a return to the Fed’s 2% inflation target sees short-dated US rates move meaningfully lower.
That timing also suits events in Europe. French budgetary politics look set to keep a risk premium in the euro ahead of April’s elections. We therefore see trading offered in a 1.10-15 range over the next four to five months. From the second quarter, however, softer US rates, moderating energy prices and clarity on French politics could trigger a gentle recovery in EUR/USD towards 1.18 by year-end 2027.
Our risky call: AI bust
Energy and AI have been the dominant global macro drivers this year and could well shape FX markets again in 2027. An AI bust is not the base case, but if it occurred, it would lead to a lower dollar. The IMF estimates the dollar could fall 6% under such a scenario.
The nature of the dollar decline could be erratic, however. If the functioning of the financial system were to come into question, such as dollar liquidity drying up again, the dollar could first rally. But the inevitable Fed support measures to address liquidity needs and the likely large rate cuts would ultimately push the dollar a lot lower.
Our bold call: Overseas growth surprises positively
EUR/USD rallied sharply in 2017 when Dutch and French elections saw euro-sceptic parties failing to advance. Having toned down her views on France leaving the euro, a decisive victory by Marine Le Pen in April and greater budget clarity could reassure markets. If eurozone growth continues to defy energy and political headwinds, a rotation to European assets could be the surprise package for EUR/USD.
We’re also watching Japan for signs that it could follow South Korea’s lead and deliver stronger growth. There, chip exports have benefited the broader economy and the Bank of Korea revised up this year’s GDP forecast to 3.3%, from 1.8% at the start of 2026. Japan supplies the manufacturing equipment and materials for chip production. Broader benefits to the economy from loose fiscal policy could see upside surprises to Japanese growth, tighter Bank of Japan policy and a much weaker .
