After one of its weakest annual performances in decades, the US dollar is entering 2026 at a crossroads, with expectations of a moderate recovery but with clear divergence across major currencies, particularly the Japanese yen and the Chinese renminbi.

Speaking at a recent UBS event on the global currency outlook, Rohit Arora, head of the bank’s Asia FX and rates strategy, framed 2026 not as a reversal of the dollar’s role but as a normalization following public narratives about de-dollarization in the past year that many investors and critics now consider exaggerated.

“There’s been no convincing evidence of de-dollarization or diversification away from US assets,” Arora says, noting that capital inflows into US markets remain resilient despite last year’s volatility.

UBS expects the US dollar index ( DXY ) to experience a moderate recovery in 2026, anticipating a 2-3% overall gain for the year, which would see the DXY rebound to around the 100 mark by the year's end. This follows a sharp depreciation of roughly 10% in 2025.

According to Arora, a “stagflation-like scenario” is expected in Q1 2026, where the DXY could weaken by another 2% after falling by about 2% in late Q4 2025. The expected decline assumes downside economic data surprises and labour markets remaining weak, with the US unemployment rate peaking at about 4.7%.

In Q2 2026, the dollar is expected to rebound by 4-5% through the remainder of 2026 based on support from a number of factors, including: US President Donald Trump’s “One Big Beautiful Bill Act”, a package of tax reforms, border security measures, social safety net cuts, and green energy rollbacks; continuing boost to the US economy and capital flows from AI-related investments; and expected acceleration of  US productivity growth in coming years.

Largely stable RMB

Against this backdrop, the renminbi is expected to remain largely stable against the US dollar but to appreciate against other non-dollar currencies like the euro and yen, says UBS senior China economist Zhang Ning at the same event.

Both Zhang and Arora expect the renminbi to appreciate gradually over the next several years, but not necessarily meaningfully and rapidly.

The Chinese currency is expected to trade around 7 yuan against the greenback by the end of 2026, and maybe slightly stronger at 6.9 by the end of 2027.

This view is influenced by China's strong current account surplus and capital inflows on the positive side, countered by an elevated yield gap between China and the US, a strengthening dollar in the second half, and China's deflationary pressures on the negative side.

The renminbi is one of UBS's most preferred currencies in Asia, which it forecasts to outperform the euro and the yen by about 5%.

The bank is underweight and relatively cautious on the Japanese yen, with Arora forecasting that the USD/JPY will grind back towards the high 150s, specifically 158 or so, by Q2 and Q3 2026, with risks of even more weakness.

The main drivers for the yen's underperformance are negative real rates, which would fuel capital outflows, and risks of further fiscal easing, Arora says.

Asean outlook

The Asean region is forecast to experience a slight slowing of aggregate growth but a normalization to trend growth, says Grace Lim, senior Asean and Asia economist at UBS.

Aggregate growth for the Asean Six region ( Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam ) is pencilled in at around 5% for 2025 and is projected to slow slightly to 4.8% in 2026. This is largely considered at-trend growth, normalizing from above-trend growth in the previous year. The pullback partially reflects a high base from a boost in export front-loading in 2025.

“The growth picture is supported by tech exports, which provide offsets to ongoing tariff-related drags and are particularly supportive for Vietnam, Malaysia, and Singapore,” says Lim. “Tech exports were the primary driver of the export upturn in the second half of 2025, up about 30% year on year year-to-date, contrasting with non-tech exports being up around 5%,” says Lim.

Asean economies projected to grow above trend in 2026 are Vietnam ( 7% ), Indonesia ( 5.2%, from 5% last year ), Malaysia ( 4.4% ), and Singapore.

Meanwhile, growth is expected to be below historical average in the Philippines ( 5.3% in 2026, historically closer to 6% ) and Thailand ( slowing to around 2% in 2026 from 2.3% last year ).

Easing cycle near end

Monetary easing, which accelerated in 2025 due to a softer US dollar, lower oil and food prices, and growth-based support from tariffs, is nearing its end. Most central banks are closer to the end of their respective easing cycles, with expectations of at most one to two cuts across the region this year.

“This means one more rate cut is expected in the Philippines; Bank Indonesia and Bank of Thailand have room for two more rate cuts, and Bank Negara Malaysia will likely remain unchanged,” she says.

Terminal rates for many of these economies will land closer to neutral rather than turning accommodative. Monetary easing is therefore not likely to be a key driver of growth in 2026.

Fiscal consolidation efforts are likely to continue in Malaysia, Thailand, and the Philippines. Fiscal expansion is not expected to drive growth, except potentially in Indonesia, where growth may be supported by a stronger fiscal multiplier due to more coordinated policy execution.