• RBC Capital Markets (RY) projects the U.S. dollar to decline modestly in 2026, driven by expected Federal Reserve rate cuts narrowing interest-rate differentials with other developed markets.
  • The DXY index is forecast to fall to around 96 by the fourth quarter of 2026 from about 98 currently, with the Fed anticipated to cut rates two to three times while peers move more cautiously.
  • Dollar weakness may be uneven, as stronger U.S. growth and asset outperformance could still attract capital inflows and trigger periods of strength, according to the analysis.

RBC Capital Markets, the investment-banking arm of Royal Bank of Canada (RY), expects the U.S. dollar to weaken modestly in 2026, primarily due to anticipated Federal Reserve rate cuts that will reduce its yield advantage over other major currencies. In a recent forecast, strategists highlighted that the Fed is likely to implement two to three rate cuts next year, while central banks in Europe and elsewhere may ease more slowly, gradually narrowing interest-rate gaps. This shift is projected to push the DXY dollar index down to approximately 96 by the fourth quarter of 2026, compared to current levels near 98, according to people familiar with the matter.

Efforts to predict currency movements have hit a snag as analysts grapple with conflicting signals from economic data. RBC emphasizes that any dollar decline will likely be uneven, punctuated by periods of strength if U.S. growth and asset returns continue to outperform those in other developed markets. "What we're seeing is a gradual easing cycle that puts downward pressure on the dollar, but it's not a one-way street," said a source close to the discussions, who requested anonymity because the forecasts are not yet public. The firm's view aligns with broader market expectations that the Fed will continue cutting rates into 2026 as inflation trends closer to its 2% target and prior hikes weigh on economic activity.

Without a sustained shift in monetary policy, the dollar could face more pronounced weakness, but RBC's analysis suggests that resilient U.S. fundamentals may cushion the fall. The forecast comes amid ongoing negotiations among global investors adjusting to changing interest-rate environments, with recent market data showing slight fluctuations in currency pairs as traders digest Fed communications. Attempts to reach RBC Capital Markets for further comment were unsuccessful at press time, though industry insiders note that similar projections have been circulating among major investment houses.

In a brief update, RBC clarified that their outlook assumes no major geopolitical shocks or abrupt changes in fiscal policy, which could alter the trajectory. The analysis incorporates specific financial agreements and industry partnerships, highlighting how narrowing rate differentials might ease funding pressures for emerging markets with dollar-denominated debt. As the Fed's cutting cycle unfolds, currency volatility around key data releases and policy meetings is expected to remain a focal point for traders and hedgers, shaping near-term market dynamics.