The US dollar is down on most fronts this year but it came after years of gains. The team at Scotiabank says don't get too comfortable with USD longs as the worst is yet to come.
In their Focus On 2026 outlook, Scotia’s Shaun Osborne and Eric Theoret are sticking to their guns: they see broad USD weakness playing out through 2026 and into 2027.
The core thesis here is simple: Divergence.
Scotia expects the Fed to cut rates significantly—taking the target rate down to 3% by the first half of 2026. Meanwhile, other major central banks are expected to make few policy changes or even tighten.
It's the classic rate differential trade and erodes the two pillars that have held the dollar up for so long: higher relative growth and those juicy yield differentials. We’ve been hearing about the "end of US exceptionalism" for a while, but Scotia thinks the real pain point for the USD hits in Q2/Q3 of 2026 as the US labour market slows down and the Fed stays dovish.
The Euro and Yen: The quiet climbers
For the euro, the ECB is expected to leave rates unchanged, which should boost EUR/USD higher. Scotia is targeting a medium-term move into the 1.22-1.24 range (spot at 1.17).
For the yen, with the BoJ expected to tighten modestly in 2026, the currency finally gets some love. The forecast sends USDJPY down to 140 by late 2026 and 130 by the end of 2027. (spot at 155.68)
The Contrarian Trade: Buy the Loonie
If you’re looking for a non-consensus trade, this is it. The market is overwhelmingly short CAD right now, but Scotia sees a massive reversal incoming.
While the Fed is cutting to 3%, Scotia expects the Bank of Canada to actually start hiking rates in the second half of 2026.
They see the spread between the Fed and the BoC—which is currently a massive 175 bps—collapsing to just 25 bps by the end of next year. As that compression happens, their forecast puts USDCAD to 1.35 by year-end 2026, dropping to 1.30 by 2027. (spot at 1.3775)
Emerging Markets: Caution on the Peso
For the carry traders, the outlook on the Mexican Peso (MXN) is a lot less rosy. Scotiabank is bearish here despite the yield.
Why? Banxico is cutting rates just as volatility is picking up. The narrowing spread with the US, combined with trade uncertainty around the CUSMA review, makes the risk-reward look poor. They see USDMXN grinding higher to 19.00 next year and 20.40 by 2027.
Scotiabank FX Forecasts at a Glance
Here are the key levels they are watching for the majors by December 2026:
- EURUSD: 1.21
- USDCAD: 1.35
- USDJPY: 140
- GBPUSD: 1.38
- USDMXN: 19.00
If Scotia is right, the "higher for longer" US yields trade is dead, and the rotation out of the dollar is the big macro play for 2026.
