Traders Bet on Future Dollar Weakness as ECB Rates Expected to Climb in 2026
Dollar bears are placing their chips. The market's starting to whisper—and then shout—about a coming shift. The catalyst? A projected climb in European Central Bank rates, set for 2026. It's a classic macro play, but this time, the timing's everything.
The Setup: Divergence Trade 2.0
For years, the dollar ruled on higher-for-longer rate supremacy. That narrative's cracking. Traders aren't just watching current spreads; they're front-running the forecast. The bet is simple: as the ECB gets hawkish in 2026, the euro strengthens, and the dollar's dominance gets a haircut. It's a forward-looking wager on monetary policy divergence—in reverse.
The Mechanics: Pricing in the Distant Future
This isn't about tomorrow's payroll data. This is the futures market doing what it does best: discounting events years ahead. Positions are building in FX derivatives and rate futures, all pointing to a 2026 pivot. The smart money isn't waiting for the press conference; it's positioning for the headline before it's written. They're trading the rumor of the rumor.
The Bigger Picture: A Weaker Dollar World
A soft dollar reshuffles the global deck. Commodities priced in USD get a boost. Emerging market debt pressures ease. For crypto? It often acts as a high-beta, non-sovereign alternative when fiat faith wobbles. A structural dollar decline could open floodgates—turning today's niche hedge into tomorrow's mainstream play.
One cynical finance jab? It's the same herd that chased the last trend, now paying analysts to justify the next one. The closing thought: markets don't wait for reality. They trade the forecast, and right now, the forecast says 2026 belongs to the ECB. Whether that's genius or groupthink, the positions are already on the books.
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.
Get $50 free to trade crypto when you sign up to Bybit now
