J.P. Morgan Research has issued a compelling and detailed bearish outlook on the US dollar, forecasting a continued period of weakness through 2025 and potentially into 2026. This pronouncement signals a significant shift in global currency dynamics, with the venerable financial institution anticipating that emerging market (EM) currencies are poised for a period of robust outperformance. The implications for global financial markets are profound, suggesting a rebalancing of capital flows and a potential re-evaluation of investment strategies worldwide.
The immediate consequence of this forecast is a heightened expectation for a depreciating greenback, which has already seen its worst first-half performance in over 50 years in 1H25, with the DXY index falling by 10.7%. This trajectory is expected to continue, fostering an environment where assets outside the U.S. become relatively more attractive, and investors begin to recalibrate their exposure to dollar-denominated holdings.
What Happened and Why It Matters
J.P. Morgan's bearish stance on the US dollar is not an isolated prediction but is rooted in a comprehensive analysis of both cyclical and structural shifts within the global economy. The bank identifies several key factors contributing to this outlook, painting a picture of "fading U.S. exceptionalism."
A primary driver is the anticipated moderation in U.S. economic growth, expected to decelerate more significantly than growth in other developed and emerging markets. Indicators such as jobless claims, services PMIs, construction, and auto sales are already showing signs of slowing momentum. This moderation is coupled with ongoing policy uncertainties, including the imposition of broad-based tariffs and questions surrounding the independence of the Federal Reserve, which together contribute to what J.P. Morgan describes as a "USD-negative cocktail." Furthermore, rising fiscal concerns, stemming from substantial spending packages and an inconsistent revenue outlook, are leading investors to re-evaluate their holdings of dollar-denominated assets. The dollar's currently elevated valuations are also cited as a contributing factor to its anticipated depreciation. There's a discernible trend of investors diversifying their currency exposure away from US dollar assets, reflecting a reduced reliance on the dollar by foreign investors, evidenced by a falling share of foreign ownership in the U.S. Treasury market.
In stark contrast to its dollar view, J.P. Morgan Research anticipates an outperformance of emerging market currencies. This optimistic outlook for EM currencies is bolstered by improving growth patterns outside the U.S. and the historical inverse relationship between EM assets and the US dollar. Stronger performance is specifically anticipated for EMEA (Europe, Middle East, and Africa) currencies, with Asian currencies, particularly those with significant accumulations of US assets, also expected to benefit from hedging or repatriation flows. The expectation of Federal Reserve interest rate cuts is seen as a key catalyst for boosting both EM currencies and stocks, as a sustained weakening of the USD makes riskier assets more attractive. While overall EM growth is projected to slow slightly, the growth of EM (excluding China) relative to the U.S. is expected to increase. J.P. Morgan is particularly bullish on India, South Korea, and Brazil within the emerging markets, identifying them as key beneficiaries.
Winners and Losers in a Shifting Currency Landscape
A weakening US dollar and strengthening emerging market currencies will invariably reshape the competitive landscape, creating clear winners and losers across various sectors and geographies. Companies with a significant international footprint and those involved in commodity production are particularly poised to benefit, while others may face new headwinds.
US-Based Multinational Corporations (MNCs) with substantial foreign revenue stand to gain significantly. When the US dollar weakens, earnings generated abroad, denominated in stronger local currencies, translate into more dollars upon repatriation. This currency translation effect can substantially boost reported revenue and profit margins for giants like Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), PepsiCo (NASDAQ: PEP), and 3M (NYSE: MMM), which derive a large portion of their sales from overseas. Such companies may also find it more attractive to expand operations or make acquisitions in foreign markets as their dollar goes further. Conversely, US Importers and Retailers of Imported Goods are likely to face increased costs. A weaker dollar means that imported goods become more expensive in dollar terms, squeezing profit margins unless these higher costs can be passed on to consumers. Companies like Walmart (NYSE: WMT) or Target (NYSE: TGT), heavily reliant on global supply chains, may need to re-evaluate their sourcing strategies.
US Exporters will experience enhanced competitiveness as their products become cheaper for foreign buyers. This could lead to increased demand, higher sales volumes, and potentially better profit margins, benefiting sectors such as manufacturing and agriculture. Conversely, Foreign Companies with a High Percentage of Sales and Earnings Generated in the US will see the value of their dollar-denominated revenues diminish when converted back to their stronger local currencies, impacting their reported earnings.
Perhaps the most significant winners will be Emerging Market Companies and Economies themselves. Many EM governments and corporations carry dollar-denominated debt. A weaker dollar significantly reduces the cost of servicing and repaying this debt in local currency terms, improving fiscal flexibility, strengthening balance sheets, and enhancing investor sentiment. Furthermore, a weaker dollar typically coincides with higher commodity prices, as many globally traded commodities are priced in USD. This benefits Commodity Producers, especially those in emerging markets, boosting their trade balances and accelerating domestic growth. For EM companies focused on domestic markets, lower costs of imported inputs (if priced in USD) can support margins. This environment also provides EM central banks with more monetary policy flexibility, allowing them room to cut rates and stimulate domestic demand without fear of capital outflows.
Industry Impact and Broader Implications
The anticipated shift in currency dynamics, spearheaded by a weakening US dollar and ascendant emerging market currencies, is not merely a financial phenomenon; it is a powerful force poised to reshape broader industry trends and global economic structures. This movement is deeply intertwined with macro-level shifts such as de-dollarization, inflationary pressures, and the evolving landscape of global trade.
One of the most profound implications is its contribution to the de-dollarization trend. While the US dollar is expected to retain its reserve currency status due to its trustworthiness, its share in central bank foreign exchange reserves and commodity trade has been gradually declining. J.P. Morgan acknowledges these emerging signs, suggesting a slow but steady shift in the global financial architecture. A weaker dollar can accelerate this process, potentially reducing the U.S.'s geopolitical influence and possibly increasing its borrowing costs if foreign central banks further diversify their holdings away from U.S. Treasury bonds. Countries like China, India, and Brazil are already actively exploring alternative currencies for trade settlement, with the Chinese yuan gaining traction. This rebalancing could lead to a more multipolar global financial system over the long term.
For the U.S. economy, a weaker dollar, while boosting exports, could also exacerbate inflationary pressures by making imported goods more expensive. Historically, the pass-through of exchange rate moves to U.S. consumer prices has been relatively contained, but this effect could be amplified by ongoing trade policies and tariffs. U.S. industries heavily reliant on imported raw materials or components may face increased operational costs, potentially impacting profitability or forcing them to pass on higher prices to consumers. Conversely, emerging market economies could see a reduction in imported inflation due to stronger local currencies, providing their central banks with more flexibility to cut interest rates and stimulate domestic growth.
The ripple effects extend to competitors and partners globally. U.S. exporters could gain a competitive edge in international markets due to more attractively priced goods. Conversely, businesses in developed markets whose currencies strengthen against the dollar (e.g., Eurozone, Japan) might find their exports becoming relatively more expensive, impacting their global competitiveness. For emerging market partners, stronger EM currencies and reduced dollar-denominated debt burdens generally foster economic stability and growth, potentially strengthening trade and investment ties.
Historically, periods of sustained dollar weakness have often coincided with outperformance in emerging market assets. For instance, from 2004 to 2011, and during much of 2020, EM equities significantly outperformed developed market equities. This historical precedent provides a compelling backdrop for J.P. Morgan's current forecast. Moreover, events like the Plaza Accord of 1985, where major global powers agreed to devalue the U.S. dollar, demonstrate collective efforts to address currency imbalances when the dollar becomes excessively strong, although the current scenario is driven more by market forces and economic fundamentals than explicit intervention. Regulatory bodies and central banks, particularly the U.S. Federal Reserve (FRB) and emerging market central banks, will be closely monitoring these currency shifts. The Fed might face a delicate balancing act, needing to consider the inflationary impact of a weaker dollar against its mandates for employment and stable prices. EM central banks, on the other hand, could gain newfound freedom to implement more growth-supportive monetary policies.
What Comes Next
The road ahead, shaped by a bearish US dollar and surging emerging market currencies, promises a period of significant dynamism, necessitating strategic pivots from both businesses and investors. This shift represents not merely a short-term fluctuation but potentially a structural rebalancing of global financial power.
In the short-term, the primary catalyst for further dollar weakness will likely be the anticipation of Federal Reserve interest rate cuts. As the FRB eases monetary policy, it tends to make dollar-denominated assets less attractive, pushing the greenback lower and enhancing investor appetite for riskier assets, including those in emerging markets. Policy uncertainty, particularly concerning U.S. trade tariffs or unexpected pronouncements regarding the Fed's independence, could also trigger immediate downward pressure on the dollar. However, a near-term challenge for EM assets could arise if U.S. bond yields unexpectedly rise, attracting capital away from developing economies.
Long-term, J.P. Morgan suggests a structural decline in the dollar is increasingly probable, potentially leading to a "dollar discount" that could persist for several years. This scenario is buttressed by moderating U.S. growth, sustained global policy support outside the U.S., and a decreasing investor demand for U.S. assets. A persistently weaker dollar would generally foster global economic growth and benefit EM economies. While the dollar's role as a reserve currency is expected to remain intact, its gradual decline in share in foreign currency reserves is a plausible long-term outcome. This extended period of depreciation could resemble the post-2002 era, given the dollar's current high valuation.
For businesses, strategic pivots are essential. U.S. multinational corporations should optimize their currency hedging strategies and potentially re-evaluate their supply chains to leverage cheaper inputs from countries with stronger currencies. U.S. exporters, on the other hand, should capitalize on their newfound price competitiveness to expand market share abroad. Emerging market businesses, particularly those with dollar-denominated debt, will find a significant reduction in their debt servicing costs, freeing up capital for investment and expansion. These companies should focus on leveraging improved domestic purchasing power and potentially expanding into regional markets.
Investors will need to actively diversify their portfolios. This involves increasing exposure to international equities, particularly in emerging markets like India (BSE: RELIANCE), South Korea (KRX: SAMSUNG), and Brazil (B3: PETR4), and Europe. J.P. Morgan explicitly recommends overweighting Asia (ex-Japan) equities. Emerging market local-currency bonds and hard currency debt are also considered attractive investment opportunities. Furthermore, commodities and gold can serve as effective hedges against a weakening dollar and potential rising inflation. The key challenge for investors will be navigating potential short-term volatility and maintaining a selective approach within emerging markets, favoring economies with robust macroeconomic fundamentals.
Potential scenarios range from a "Global Rebalancing" where a weaker dollar facilitates healthier global trade and EM growth, to a "Managed Volatility" scenario with gradual dollar decline interspersed with periods of consolidation. A less favorable "Protectionism and Fragmentation" scenario could emerge if escalating trade tensions lead to greater global economic uncertainty. Ultimately, an "Emerging Market Differentiation" scenario is most likely, where while the overall trend favors EM, some countries will significantly outperform others, demanding highly selective investment strategies.
Conclusion
J.P. Morgan Research's bearish outlook on the US dollar and the corresponding bullish forecast for emerging market currencies marks a pivotal moment in global finance. This detailed analysis, rooted in moderating U.S. growth, divergent global monetary policies, and shifting investor sentiment, signals a fundamental rebalancing of economic power and a potential multi-year trend for currency markets.
The key takeaway is that the era of "U.S. exceptionalism," which has supported a strong dollar, appears to be waning. This provides a fertile ground for emerging markets to shine, driven by reduced dollar-denominated debt burdens, increased capital inflows, and commodity price tailwinds. For businesses, this means re-evaluating supply chains, optimizing international trade strategies, and leveraging competitive advantages in foreign markets. For investors, diversification away from purely dollar-denominated assets, with a strategic allocation towards international and emerging market equities and bonds, becomes paramount.
Moving forward, investors should closely watch several key indicators. The trajectory of Federal Reserve interest rate policy, global inflation trends, and any escalation in international trade tensions will be critical. Furthermore, monitoring capital flows into and out of emerging markets, as well as the fiscal health and policy responses of key EM economies, will provide crucial insights into the sustainability of this currency shift. While the US dollar is unlikely to lose its reserve currency status overnight, its gradual, structural decline implies a more diversified and potentially more volatile global financial landscape ahead, where agility and informed decision-making will be key to unlocking opportunities and mitigating risks.
The financial world is entering a new chapter, one where the greenback's dominance faces persistent challenges, and the vibrant economies of the emerging world step further into the global spotlight. This shift demands a proactive and discerning approach from all market participants.
