FX Outlook 2027: Seven key risks

The resilience of the AI trade in equities has been tested of late, and a more decisive unwind could become an overarching FX driver next year. We think the impact of a major US tech selloff on currencies would depend on how far it spreads to broader US and global risk assets, whether it heavily threatens financial stability, and how it impacts the inflation backdrop. Crucially, the initial FX reaction may look very different from the medium-term move.

The dollar still retains decent safe-haven appeal by our estimates, having recovered from the 2025 “sell America” period. Yet episodes in 2026 where AI concerns hit tech stocks without materially spilling into broader equities were accompanied by some USD underperformance. We think contained US tech-specific weakness would continue to weigh moderately on the dollar next year, with low-yielding haven currencies such as the yen, Swiss franc and euro benefiting the most.

The dynamics would be different if tech losses triggered a broader selloff. In that scenario, we would expect an initial safe-haven boost to the dollar, followed by a larger depreciation as the shock deepens and the Federal Reserve response comes into focus. The greater the threat to financial stability, the stronger the case for the Fed to provide liquidity and prevent a global financial crisis-style credit crunch, ultimately weighing on the dollar. Over the medium term, we would expect JPY, CHF and EUR to outperform, while the Australian dollar, New Zealand dollar and non-European EM currencies would be hit harder, consistent with recent AI-driven selloffs (see chart below).

There is, however, an important inflation caveat. A severe risk-off shock would itself reduce inflation risks through potential job losses, negative wealth effects and tighter credit conditions. But if inflation remains elevated, the Fed may be slower to ease, not least to preserve the safe-haven role of the Treasury market. In that scenario, we think the dollar would outperform for longer, while European currencies would be less insulated than under a more benign inflation backdrop.