Dollar Depreciation Expected Amidst Fed Policy Shifts and EM Carry Trade Opportunities

Key Quotes

"I do think that there is further scope for the dollar to to sell off in in the first half of next year. Um and just sort of taking stock of where we are, I think it's interesting that the conversation we had in late April of this year was very much focused on uh developed market currencies so the dollar versus things like the euro or the Japanese yen."

Brian Dunne indicates that he anticipates a decline in the US dollar during the initial half of the upcoming year. Dunne highlights that previous discussions focused on the dollar's performance against other major developed market currencies, such as the euro and Japanese yen.

"What has moved instead has actually been the dollar against uh higher yielding currencies so the best example of that would be Brazil this year. Brazil has appreciated about 17% year to date in spot returns but because of the high nominal and real interest rate carry that it has in total returns, it's appreciated almost 30% and most of that has come after we spoke."

Brian Dunne points out that significant currency movements have occurred against higher-yielding currencies, using Brazil as a prime example. Dunne explains that while Brazil's spot returns showed a 17% appreciation, the total returns were nearly 30% due to high interest rate carry.

"The debasement trade for me was really always a concern about fiscal sustainability really across the globe. You started seeing things like crypto, things like gold start to appreciate particularly rapidly around, you know, around Liberation Day actually, and that was mostly a US fiscal sustainability concern."

Brian Dunne clarifies that the "debasement trade" is fundamentally linked to concerns about fiscal sustainability globally. Dunne notes that assets like cryptocurrency and gold saw rapid appreciation, particularly around a specific event, driven primarily by worries about US fiscal sustainability.

"The difference now on the go forward is that we won't we're very unlikely to have that. We have two, you know, two things that are very significant: one being we get the resumption of US data and labor market has been particularly in focus, and then second is we're going to get an announcement of who the Trump administration is nominating to be the Fed chair."

Brian Dunne explains that the current market environment is set to change due to two key upcoming events. Dunne identifies the resumption of US economic data, with a specific focus on the labor market, and the announcement of the next Fed chair nominee as significant drivers.

"I would say, um, the market has coalesced around them cutting again. I think it'll be interesting to see what level of, um, descent, you know, is publicly made. We had two last time, one was Maren for 50 and one was Schmidt for no cut."

Brian Dunne observes that the market consensus is anticipating another interest rate cut from the Federal Reserve. Dunne expresses interest in observing the extent of public disagreement within the Fed, referencing previous instances of dissenting votes on rate decisions.

"I would say dollar China lower in optionalized format is one of my favorite trades going into 2026. And then I would say some basket of EM carries, they'll it's still our bet, our favorite and preferred expression for dollar weakness."

Brian Dunne identifies specific trading strategies he favors for the upcoming period. Dunne highlights a "dollar China lower" trade in options as a top pick and also favors a basket of emerging market carry trades as a preferred way to express a view on dollar weakness.