Societe Generale: Short-term bearish, but the dollar will “return to the king” at the end of 2026

The Zhitong Finance App learned that Société Générale said that although the US dollar will be under pressure in the short term, it will regain its upward trend in the medium to long term with the comparative advantage of the US economic fundamentals to achieve the “return of the king” of the US dollar.

Societe Generale pointed out that weak US economic data, particularly weakening labor market data, is a core factor affecting the focus of the foreign exchange market. This weakness is offsetting the market's optimism about the AI revolution, prompting the market to shift its focus to drastic interest rate cuts that the next chairman of the Federal Reserve may implement.

The forecast predicts that the dollar will face downward pressure in the next few weeks and early 2026 due to a slowdown in the US economy in the fourth quarter. Despite this, in the medium term, the bank believes that the US economic growth prospects will not deteriorate drastically, and the extent of deterioration will not exceed the part that has already been digested by the market. Unless there is a major contraction in US fiscal policy, the dollar's downside will be limited.

The bank emphasized a key contradiction: tight fiscal austerity combined with loose monetary policy will undoubtedly weaken the dollar, but loose monetary and fiscal policies are unsustainable in the long run. As market attention shifts from short-term interest rate fluctuations to medium- to long-term growth fundamentals, the US dollar index is expected to pick up in the second half of 2026, with a year-end target of 100.2.

The structural dilemma of non-US currencies is difficult to break through

As major non-US currencies, the euro and yen face their own structural challenges. EURUSD is expected to use the weak dollar to test a high of 1.20 in early 2026, but this is more driven by external factors. Weak economic growth within the Eurozone, an aging population, and ongoing pressure from geopolitical conflicts make it difficult to maintain long-term strength. Once the dollar regains momentum, EUR/USD is expected to gradually decline. The target for the end of the year is 1.14, which is close to its average for the past ten years.

The situation with the yen is even more serious. As the worst performing major currency in the past five years, the real effective exchange rate of the yen has fallen by nearly 30%. The long-term low interest rate environment, moderate levels of inflation, and concerns about the sustainability of public debt have combined to suppress the yen exchange rate. Although the Bank of Japan may start a cycle of interest rate hikes to provide a temporary resuscitation for the yen, the report believes that if the yen is to achieve a fundamental reversal, it will need to rely on the RMB policy, and this is unlikely in the short term.