US Dollar Outlook: Neutral Near Term, Weaker Through 2026, Says TD Securities

The rationale behind this updated forecast centres on several key drivers. A significant factor is the expectation of shifts in Federal Reserve (Fed) policy, specifically potential interest rate cuts later in 2025 and continuing into 2026. Such cuts would diminish the interest rate advantage that has historically bolstered the dollar. Concurrently, improving economic growth across other major global economies, particularly within the Eurozone and parts of Asia, is expected to attract capital away from US assets. Furthermore, ongoing uncertainties in trade policy and evolving fiscal dynamics within the US contribute to the view that the dollar's valuation may gradually decline over the medium term.

Why it matters for Australian investors

For Australian investors, a weakening US dollar can have multifaceted implications, particularly given the close economic ties between Australia and the US, and the global nature of crypto markets. A depreciating USD generally means the Australian dollar (AUD) could strengthen against it, making US dollar-denominated assets, including many cryptocurrencies, potentially less attractive when converted back to AUD. Conversely, it could make Australian exports more competitive on the global stage.

Australian investors holding crypto assets priced in USD, such as Bitcoin (BTC) and Ethereum (ETH) which are often quoted in USD on international exchanges, might see the AUD value of their holdings decrease if the AUD strengthens significantly against a weakening USD. This 'exchange rate risk' is a crucial consideration. When using Australian crypto exchanges like CoinSpot, Independent Reserve, Swyftx, or BTC Markets, the underlying value might still be influenced by global USD pricing dynamics, even if transactions are conducted in AUD. Therefore, understanding the USD's trajectory is vital for managing portfolio exposure.

Impact on the AUD market

The projected weakening of the US dollar through 2026 could have a notable impact on the Australian dollar (AUD). A generally weaker USD environment typically provides tailwinds for commodity-linked currencies like the AUD, as commodities are often priced in US dollars. If the USD depreciates, it effectively makes commodities cheaper for buyers using other currencies, potentially increasing demand and supporting commodity prices, which in turn benefits the AUD.

For Australian investors involved in crypto, this dynamic is important. While the AUD might strengthen against the USD, the value of their crypto assets, if they hold primarily USD-denominated coins, might not see the same proportional gains when converted. It's a delicate balance to monitor, as the relative strength of the AUD can offset gains from the underlying crypto asset's performance. Australian financial regulators like ASIC and AUSTRAC are focused on ensuring market integrity and consumer protection, so understanding these macro-level currency shifts is part of informed investing within the regulated Australian financial landscape. Tax implications, as guided by the ATO, would apply to any realised gains or losses, regardless of currency fluctuations, further underscoring the need for careful tracking.

What to watch next

Australian investors should closely monitor several key indicators as TD Securities' forecast unfolds. Firstly, track the Federal Reserve's communications and decisions regarding interest rates. Any deviations from the anticipated rate cut schedule could alter the dollar's trajectory. Similarly, news pertaining to economic growth and inflation figures from major global economies, particularly those in the Eurozone and Asia, will be crucial. Stronger economic performance in these regions could accelerate the shift of capital away from US assets, further pressuring the dollar.

From an Australian perspective, keep an eye on the AUD/USD exchange rate. A sustained strengthening of the AUD against the USD would align with TD Securities' projections. Crypto investors should also observe the performance of major cryptocurrencies relative to both USD and AUD. While the underlying assets might experience volatility, the currency overlay adds another layer of complexity. Ongoing trade policy developments and fiscal health reports from the United States should also be on investors' radar, as these can introduce unforeseen volatility or reinforce the predicted trends. Ultimately, remaining informed about global economic shifts and their implications for currency markets is paramount for navigating the crypto landscape from Down Under.