FX moves: Geopolitics versus monetary policy

As the opening quarter of 2026 draws to a close, currency markets have gone through a clear regime shift. Early in the year, the US dollar was on the back foot, sliding for instance to a four-year low against the euro, while emerging market and carry-oriented currencies attracted strong investor interest. In recent weeks, however, these dynamics have partially reversed amid rising geopolitical tensions. In this FX Viewpoint, we assess how these shifting macro and geopolitical forces may shape currency markets over the next twelve months.

Key takeaways

• The USD came under renewed pressure at the start of the year but has recently been supported by the Middle East conflict. In the event of a de‑escalation, the USD is likely to resume its depreciation trend vs. EUR – with monetary policy divergence and geopolitical developments in focus.
• With policy normalisation progressing gradually, real rates still negative, and limited repatriation by Japanese investors, we forecast only modest JPY appreciation.
• The CNY is trading at a 3-year-high against the USD. Beijing does not welcome rapid appreciation but tolerates moderate strength, with a clear focus on stability over speed.