Key takeaways We are bearish the U.S. dollar, rooted in the country’s unsustainable trade and fiscal deficits, adversarial international policies, growing concerns about independence of the Federal Reserve and the currency’s overvaluation. Persistent inflation and stronger economic growth support the case for rate hikes by global central banks. The growth outlook remains mostly positive across emerging markets. Latin America, Africa and the Middle East now offer higher yields. Brighter days are in store for the Canadian dollar , as the economy benefits from improvement in household and business sectors. We expect the loonie to strengthen toward C$1.30 in 12 months. The yen may outperform other developed-market currencies. It could rally toward our 12-month forecast of 140 per U.S. dollar as Japanese policymakers support the yen with a range of policies. Taking stock of currency markets It might appear as though foreign exchange markets have been quiet lately. But a glance under the surface of the dollar’s stability tells a different story. The commonly watched U.S. dollar index has mostly traded within a 5% range for the past year and expectations for currency volatility are near decade lows (Exhibits 1 & 2). Meanwhile, the 10-15% returns from some emerging market (EM) currencies and Japanese currency intervention suggest a livelier year ahead. So, with geopolitics, corporate earnings and economic trends pointing to bigger currency moves, why is the U.S. dollar not more active? Exhibit 1: Limited dollar volatility over the past year Note: As at August 19, 2026. Source: Bloomberg, RBC GAM Exhibit 2: Expectations of currency volatility nearing lowest level in a decade Note: Volatility measured using CVIX index. As at August 19, 2026. Source: Bloomberg, RBC GAM Part of the answer lies in offsetting forces. The U.S. dollar’s overvaluation and fiscal largesse would normally see the greenback weaken. But advances in artificial intelligence and massive capital influx by foreign investors into U.S. equity markets have propped up the currency (Exhibit 3). Similar offsetting forces exist in Europe, where investors have fretted over a long list of negatives (Exhibit 4), but where the euro has been helped by a gradual recovery in economic indicators. As a result, both the U.S. dollar and euro have been kept stable by these counterbalanced factors. Exhibit 3: Strong demand for U.S. equities has supported the dollar Note: As at June 1, 2026. Equity flow data is a quarterly sum. Source: EPFR, TD Securities, Bloomberg, RBC GAM Exhibit 4: Europe faces growing headwinds Note: As at August 20, 2026. Source: RBC GAM We’ve seen more varied performance from other currencies, in both emerging and developed markets, with cyclical and commodity currencies performing best over the past 12 months (Exhibit 5). Exhibit 5: Cyclical and commodity currencies have outperformed over the past year Note: As at August 18, 2026. Source: Bloomberg, RBC GAM Currency outlook: still positive on emerging markets We remain bearish the U.S. dollar, in consideration of the currency’s longer-term overvaluation and the country’s unsustainable trade and fiscal deficits among other short-term factors addressed in this section. That negative outlook had been slow to materialize given stronger U.S. economic activity, higher interest rates and equity outperformance. But fresh concerns have now begun to surface. The recent pickup in economic activity outside of the U.S. suggests that the dollar could face headwinds (Exhibit 6). The Fed has also proven reluctant to hike rates even as inflation climbed. The central bank’s new Chairman, Kevin Warsh, promised bold action to tackle inflation but lost credibility in the bond markets after sidestepping tough questions during the bank’s July press-conference. We do think the Fed’s policy-making committee is dedicated to acting in the best interests of Americans. However, central bank independence is top of mind after Trump’s repeated efforts to fire board members earlier this year. Consequently, investors have started demanding higher yields as compensation to lend to the U.S. government. This has led to recent steepening of the yield curve, where interest rates on longer-maturity bonds rise more than those on shorter maturities. At a time of unchecked fiscal spending, this curve steepening is a sign of deteriorating credibility that also hurts the U.S. dollar in a so-called “debasement” trade. Exhibit 6: The dollar could face headwinds as global growth accelerates Note: As at August 19, 2026. US vs. rest of world data is trade weighted. Source: Dallas Fed, ICE, BEA, BLS, RBC GAM A falling U.S. dollar should be bullish for most currencies, though we are more positive on EM exchange rates than most developed market ones. Several key factors underpin this view: Emerging markets generally offer higher yields than their developed counterparts. The highest yields can be found in Latin America, Africa and the Middle East. On balance, EM currencies are still cheap, even after substantial gains over the past year. Asian currencies are among the world’s cheapest. This matters to investors because Asia constitutes the largest share of EM equity indices. A greater share of global growth now originates from the emerging world. This trend is expected to continue according to International Monetary Fund (IMF) forecasts (Exhibit 7). Trump’s trade wars and isolationist policies are pushing EM nations to trade more with each other and in currencies other than the U.S. dollar. This has helped fuel gains in the Chinese renminbi. Politics are also at play, with a number of investor-friendly parties having come to power in EM countries. In stark contrast to developed-market economies, EM nations now enjoy greater fiscal and monetary credibility. This stems from their aggressive fight against inflation and more restrained fiscal spending following the COVID pandemic. Exhibit 7: Emerging markets drive a growing share of global growth Note: As at April 30, 2026. IMF forecast from 2026 - 2031. Source: IMF, RBC GAM Brighter days lie ahead for the loonie The Canadian dollar has lagged in recent years (Exhibit 8) owing to sluggish economic growth, low yields and concerns about a fraying relationship with the U.S. We think this underperformance is beginning to subside as the Canadian economy gains traction, driven by reduced uncertainty around two important economic drivers: The household sector, which is responsible for nearly two thirds of economic output, has seen many loans reset at lower interest rates than first feared. The large cohort of mortgage renewals that threatened to squeeze consumer wallets has largely passed. The business sector , which has been paralyzed by the threat of Trump’s tariffs, now shows signs of life. The Bank of Canada’s Monetary Policy Report noted a rise in business investment growth in both energy and non-energy sectors. The Bank expects that these capital expenditures will continue growing over the next three years (Exhibit 9), and any successful negotiation of a trade deal with the U.S. will facilitate greater confidence in investment decisions. Exhibit 8: Mounting challenges have left the loonie behind other developed market currencies Note: As at August 19, 2026. Source: Bloomberg, RBC GAM Exhibit 9: Canadian business investment is expected to pick up Note: As at July 31, 2026. Source: Bank of Canada, RBC GAM Stronger economic activity, in turn, will allow the Bank of Canada to reverse its accommodative stance, and raise borrowing rates to levels more closely aligned with other developed market nations. If so, investors may opt to buy back the Canadian dollars they previously sold (Exhibit 10). This short-term demand for the Loonie may prompt appreciation toward our 12-month forecast of C$1.30, but the currency would remain cheap on Purchasing Power Parity models even at those levels (Exhibit 11). We believe that bouts of U.S. dollar strength that push the exchange rate above C$1.40 will prove temporary and would offer good opportunities for investors to hedge their U.S. dollar exposure. Exhibit 10: Improving fundamentals could cause investors to buy back Canadian dollars Note: As at July 31, 2026. Source: CFTC, RBC GAM Exhibit 11: The US dollar is extremely expensive while the loonie is very cheap Note: As at August 18, 2026. Source: Bloomberg, RBC GAM Japanese intervention and the FX carry trade The ‘carry trade’ is a well-known strategy among currency traders and has been among this year’s most profitable (Exhibit 12). The approach involves selling low-yielding currencies to buy higher yielding ones, where the investor stands to earn the interest rate gap so long as currency fluctuations remain muted. With the rangebound behaviour of the U.S. dollar setting an orderly tone for FX markets this year, and with a still-wide difference between high- and low-yielding currencies, this trading technique has understandably been in vogue. Exhibit 12: Low volatility has made the carry trade among the most profitable this year Note: As at August 7, 2026. Source: Bloomberg, RBC GAM For decades, Japan has consistently offered the lowest yield among developed market nations, such that the carry trade has become synonymous with shorting the yen. Questions were raised, then, about why carry strategies didn’t suffer in late July when Japan’s Ministry of Finance intervened in currency markets to strengthen the yen. Their yen purchases were not small. The finance ministry liquidated $87 billion of their U.S. dollar holdings over two days to raise the value of the Japanese currency by 5%. Carry trades were unphased because investors had steered clear of selling the yen, anticipating such intervention was possible. This is not to say that intervention wasn’t important for the market outlook. In addition to a new headwind for the greenback, this development also has implications for bond markets. To defend the yen, Japan is forced to free up cash by selling U.S. treasuries. In turn, this selling of bonds could put upward pressure on U.S. yields which are already at elevated levels. With hopes of stemming the tide, Treasury secretary Scott Bessent increased repo facilities with Japan and joined forces with the Japanese Ministry of Finance to purchase the Japanese currency. While history shows that such coordinated interventions do cause big turning points in currency markets, Bessent’s token purchase was unconvincing. As of the end of August, the yen has since reversed half of its post-intervention gains (Exhibit 13). Exhibit 13: Yen fails to hold strength following intervention Note: As at August 31, 2026. Source: Bloomberg, RBC GAM Pushed towards action, Bank of Japan board members started hinting about imminent rate hikes. The government has also alluded to possible changes in the asset allocation of Japan’s massive pension fund, reducing foreign exposures to fund purchases of domestic bonds. The combined actions serve the dual purpose of supporting the yen while reducing Japanese government bond yields. This kind of coordination feels different than past isolated attempts to halt the yen’s depreciation and increases the odds of the currency reaching our 12-month forecast of 140 per U.S. dollar.