The dollar is catching heat from every side. Global rate expectations are drifting apart fast, and it’s not looking good for the greenback.
Investors are stacking bets that the European Central Bank (ECB) could hike rates in 2026, even while the Federal Reserve is widely expected to cut borrowing costs again this week.
The contrast is brutal, and it’s killing the dollar’s edge. The currency has already dropped more than 8% against major peers this year, and there’s no sign of a floor.
Swap markets are now pointing to a 0.06 percentage point rise in the Eurozone by end-2026. That’s a huge U-turn from the 0.04-point cut that was priced in just a week ago. The ECB’s shift comes as inflation sticks around and growth doesn’t look bad enough to justify more cuts.
Meanwhile, the Fed is still trying to steer a soft landing, with at least two more rate cuts expected next year.
ECB tightens as Fed stares down political pressure
Other central banks are also leaning hawkish. Australia and Canada could raise rates next year as their economies pick up speed. The Bank of England is projected to stop cutting by next summer.
“Hawks are being more vocal,” said Pooja Kumra from TD Securities, calling next year a potential “turning point” for central banks outside the US. If that happens, the interest rate gap between the US and its trading partners will narrow fast, and that means more pain for the dollar.
The logic is simple: Lower rates make a currency less attractive. That’s already baked into the current slump. But the next chapter could sting more if the US stays on the cutting path while others either pause or hike. Investors aren’t exactly excited to hold cash that earns less, and that’s hitting the dollar’s global demand.
Even though US rates remain higher for now, especially compared to the Eurozone, that gap may shrink soon.
Slower growth in Europe had previously justified keeping rates lower, but Trump’s trade war didn’t hit European economies as badly as expected, making rate cuts less necessary there.
Trump pushes cuts and floats new Fed names
Donald Trump, in an interview with Politico, confirmed he wants any new Fed chair to immediately cut interest rates.
Asked if a quick rate cut would be a test for his pick, Trump replied: “Yes. Well, this guy too … should too,” referring to current chair Jerome Powell. He didn’t hold back either, adding: “I think he’s a combination of not a smart person and doesn’t like Trump.”
Trump’s position is clear: rate cuts or you’re out.It’s a not-so-subtle message to every potential nominee.
Kevin Hassett, current White House National Economic Council Director, is reportedly the top pick. He’s already aligned with Trump’s thinking, saying last month that the data supports cutting “right now.”
On Monday, Hassett told CNBC it would be “irresponsible” for the Fed to map out a six-month rate plan, insisting the job is to respond to incoming data. That echoes Trump’s own calls earlier this year for the Fed to slash the benchmark rate below 2%, far below the current 3.75% to 4%.
The next Fed decision lands Wednesday, and markets expect a 25 basis point cut. Powell’s term as chair ends May 2026, but he can stay on as a governor until 2028. Still, Trump has already hinted he knows who he wants in charge.
Besides Hassett, other contenders reportedly include Christopher Waller, Michelle Bowman, Kevin Warsh, and BlackRock’s Rick Rieder. But Trump hasn’t said if he’s actually spoken with any of them. When asked in the Politico interview, he gave no answer.
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