The U.S. dollar could weaken by as much as 10% in 2026 if the Federal Reserve cuts interest rates more aggressively than markets currently expect, according to a senior strategist at State Street.
Markets are presently pricing in two quarter-point rate cuts, beginning around mid-year. However, State Street’s Lee Ferridge suggests a third cut remains possible, especially as a new Federal Reserve chair takes office and policy uncertainty increases.
Ferridge noted that deeper rate cuts would lower the cost for foreign investors to hedge U.S. assets, encouraging greater hedging activity — a dynamic that could place sustained downward pressure on the dollar.
Concerns around trade tensions, fiscal sustainability, and political influence on monetary policy have already weighed on the greenback. President Donald Trump’s nomination of former Fed Governor Kevin Warsh to succeed Jerome Powell has added to expectations of a more accommodative policy stance.
In the near term, the dollar may see a temporary rebound of 2–3% if strong U.S. economic data dampens rate-cut expectations. However, Ferridge believes broader dollar selling pressure could resume once the Fed begins cutting rates more decisively and narrows yield differentials with other major economies.
State Street data also shows that currency hedge ratios remain well below pre-2022 levels, suggesting further downside risk for the dollar as global investors adjust positioning.