USD and major currency pairs: what's driving valuations in 2026?

Key USD valuation drivers

The US dollar (USD) continued its downward trajectory, with the dollar index (DXY) losing 0.8% last week. Although the DXY has rebounded sharply after testing a four-year low of 95.57 in January — when President Trump signalled comfort with a weaker currency — it remains down 1.2% against a basket of major currencies year-to-date. Below, we examine the key valuation drivers shaping the dollar's outlook.

• (Neutral/negative) Monetary policy dynamics: Markets are pricing in two additional 25-basis-point Federal Reserve (Fed) rate cuts in 2026, most likely in June and September, followed by a further reduction in January 2027 before the easing cycle concludes.  This trajectory stands in contrast to several major central banks — notably the Bank of Japan (BoJ) and the Reserve Bank of Australia (RBA), which are on tightening paths, while the European Central Bank (ECB) is expected to hold rates in the near term. This divergence in monetary policy stances is likely to weigh on USD sentiment through the remainder of the year. A significant wildcard, however, is incoming Fed chair Kevin Warsh. Known for a more hawkish disposition relative to other chair candidates, the market will be watching closely whether he delivers the pace of rate reductions currently priced in, pursues balance sheet reduction, and safeguards the Fed's institutional independence.
• (Positive) Economic fundamentals: The US economy is forecast to expand 2.3%–2.4% in real terms in 2026, per projections from the Fed and the International Monetary Fund (IMF) respectively — both revised upward. Among S&P 500 constituents that have reported, blended earnings growth for Q4 2025 stands at 14.4%, the strongest in four years, according to Bloomberg data. Labour market conditions have shown some deceleration, though January's employment report suggests the worst of the slowdown may already be behind us.
• (Negative) Political and market stability: A principal driver of dollar weakness over the past year has been the unpredictability of US policy — particularly on trade, where the gap between initial announcements and final implementation has been pronounced. The prolonged government shutdown has compounded investor uncertainty around US-denominated assets. On a broader macro level, a global debasement trade has gained traction, with both investors and central banks diversifying away from fiat currencies towards alternative stores of value — most notably precious metals — as concerns over unsustainable fiscal trajectories mount.
• (Neutral/negative) Trade position: A structurally weaker dollar aligns with the Trump administration's core objective of stimulating exports and narrowing the trade deficit. It is worth noting that during Trump's first term, the DXY averaged around 95 even as the Fed was raising rates, suggesting the dollar has scope to extend losses from here. That said, the manner of any decline matters as much as the level — disorderly, one-directional moves risk undermining the dollar's credibility as the world's primary reserve currency, where stability is a fundamental prerequisite.
• (Negative) Hedging demand: Following several years of USD strength, many non-US institutional investors accumulated large, currency-unhedged exposures to US assets, as dollar appreciation amplified returns in local-currency terms. As that trend reverses, foreign investors are increasingly establishing hedges against USD depreciation, generating structural selling pressure on the currency.

Figure 1: DXY monthly chart

Currency pairs to watch

AUD/USD

The Australian dollar (AUD) has been the standout performer among major currencies year-to-date, appreciating 6.2% against the USD. Strength in base and precious metal prices has provided a firm tailwind for the commodity-sensitive currency. Domestically, Australia is contending with a re-acceleration in inflation: the trimmed mean consumer price index (CPI) — the RBA's preferred inflation gauge — has remained persistently above 3% since July 2025. The RBA was the first major central bank to raise interest rates in 2026 and has signalled a willingness to tighten further should inflation remain elevated against a backdrop of a relatively tight labour market. Implied rates derived from bond futures peak at 4.2% by year-end, consistent with one to two additional 25-basis-point hikes.

Looking ahead, beyond metal prices and domestic monetary policy, China's position as Australia's predominant trading partner means that any evolution in the US-China trade relationship, or in China's domestic consumption trajectory, carries material implications for the Australian dollar.

From a technical standpoint, AUD/USD broke decisively above the mild uptrend established since May 2025 on 22 January, subsequently consolidating within a new trading range above 0.69. The pair has recently met resistance at the February 2023 high of 0.7157; however, technical momentum remains constructive for a retest of this level in the near term. Over a medium-term horizon, 0.7540 — the March 2022 high — represents the next meaningful upside target. On the downside, the 20-day moving average (MA) at 0.7013 provides initial support, with the lower boundary of the current range near 0.69 acting as secondary support.

Figure 2: AUD/USD daily price chart

USD/JPY

The BoJ represents the other major central bank on a tightening trajectory. Inflation has exceeded the 2% threshold for 44 consecutive months; nevertheless, the BoJ has proceeded with considerable caution in normalising policy, requiring clear evidence of durable resilience in domestic economic activity before acting.

The most recent gross domestic product (GDP) data illustrates the dilemma confronting policymakers. The subdued headline annualised growth of 0.2% in Q4 2025 masks a more concerning dynamic: elevated living costs are suppressing consumer spending as real wage growth trails inflation. Simultaneously, raising rates too aggressively risks placing undue strain on small and medium-sized enterprises. While the negative effects of US tariffs have largely been absorbed, ongoing tensions with China are exerting pressure on Japan's tourism sector and detracting from net export performance.

Attention is now shifting to Prime Minister Sanae Takaichi's fiscal agenda after her ruling coalition secured a supermajority in the recent snap general election. Currency markets have partially priced in the proposed ¥122.3 trillion fiscal year 2026 budget and a two-year suspension of the food sales tax — valued at approximately ¥5 trillion. USD/JPY has strengthened from 147.5 to as high as 159.4 since Takaichi assumed leadership of the Liberal Democratic Party, and while the pair has retreated from its peak following suspected government intervention, it remains up 4.1% over that period.

Fundamental analysis on government bond yield differentials and purchasing power parity points to a considerably stronger yen, with fair value estimated well below 125 per dollar. However, given the structural complexities outlined above, yen normalisation is likely to be a gradual, multi-year process.

Technically, USD/JPY appears to be in a consolidation phase following an 18-month high set in January. A death cross between the 20-day and 50-day moving averages (SMAs) presents a near-term bearish signal, with the pair currently testing a critical support zone between 152.1 and 153.3. A sustained break below this zone could open a path toward the 200-day MA at 150.6. Conversely, a decisive close above 156.3 would signal a resumption of yen weakness.

Figure 3: USD/JPY daily price chart

USD/CNH

The People's Bank of China (PBoC) has allowed the renminbi (RMB) to appreciate gradually through progressively lower USD/CNY fixing rates. Both onshore and offshore yuan strengthened to 6.90 against the dollar ahead of the Lunar New Year — the strongest level since May 2023. Despite a one-year gain of approximately 5% against the USD, the RMB's performance continues to trail most major currencies, with EUR/USD and AUD/USD surging 13% and 11% respectively over the same period.

Recent data underscore China's continued dependence on exports as the primary engine of growth. While domestic demand is recovering gradually, the economy has not yet fully exited deflationary territory. The PBoC has expressed willingness to cut the reserve requirement ratio (RRR) and policy rates if conditions warrant, but the scale of direct monetary easing is likely to remain modest, consistent with the government's long-term cross-cyclical policy approach.

A stronger RMB may weigh on US-bound exports, but the impact on trade with other regions should be limited given that other major currencies are also appreciating against the dollar. On the other hand, a firmer RMB would bolster domestic sentiment and advance China's broader ambition of internationalising the currency as a major trade settlement and reserve currency. We nonetheless expect the pace of appreciation to remain measured, absent a significant loosening of the capital control framework.

Technically, the medium-term trend in USD/CNH has turned decisively bearish since the pair broke below the 200-week MA in December, opening a path toward the next support level near 6.83 — derived from the March 2023 low. That said, the relative strength index (RSI) is registering an oversold reading, suggesting a technical recovery toward resistance near 6.95 is plausible before the broader downtrend resumes.

Figure 4: USD/CNH weekly price chart

• The figures stated in this article are as of 18 February 2026 unless otherwise stated. Past performance is not a reliable indicator of future performance.