ING's 2027 FX outlook: a quiet year with fat tails, and a dollar that falls late

A quiet year, on purpose

ING expects 2027 to be a low-volatility year in foreign exchange, with the dollar drifting lower rather than falling off a cliff. The bank's outlook puts the dollar index 5% lower by the end of 2027, at 97, with the decline concentrated in the second half of the year. The theme is fat tails and slim ranges: little day-to-day movement, but large risks sitting just out of sight. m:…5316 m:…5348

Currency volatility is near its lowest level in over a decade, ING notes, and it has stayed low through events that used to move markets. A 6% fall in the Nasdaq failed to move the dollar-yen rate significantly, and global holdings of equities and bonds, worth about 300% of global GDP, now sit in a market where banks internalise much of the flow instead of trading it openly. The calm is structural as well as cyclical. m:…5318

The Fed writes the timetable

Everything in the outlook runs through the Federal Reserve. ING forecasts one final rate hike in December 2026, taking the policy rate to a 4.25% peak, followed by a nearly 100 basis point drop in the two-year dollar swap rate by the end of 2027. The dollar's turn lower is expected from the second quarter of 2027, once inflation cools enough for the Fed to start easing. m:…5316 m:…5319

The market, for now, is more hawkish than the forecast. ING's daily note says traders have priced in 85 basis points of Fed tightening from current levels, and Scotiabank puts the December pricing at 28 basis points, with 75 basis points cumulative by December 2027. The dollar index has already reached fresh 18-month highs. The disagreement is itself the trade: either the Fed hikes more than ING expects, or the dollar's turn comes sooner. m:…1199 m:…4670

The rest of the G10 is expected to move in the Fed's shadow. ING expects the European Central Bank to raise rates to 2.75% in December 2026, and the Bank of Japan to raise rates to 1.50% in December and again in March 2027. The Bank of England's terminal rate sits near 4.75%, the Riksbank is expected to reach 2.25% to 2.50% by mid-2027, and the Bank of Canada 2.75% in the first quarter of 2027. Christopher Waller has advocated for a 50 basis point hike in December, a reminder that the Fed's hawks are still arguing for more, not less. m:…5319

The winners if the dollar softens

If the dollar does soften, ING's picks are the yen, the Swiss franc and the New Zealand dollar. The yen offers the best risk-reward profile among G10 currencies, in ING's view, supported by undervaluation and limited risk of dovish repricing, and rate differentials in the G10 favour the yen and the franc. The Reserve Bank of New Zealand is expected to deliver at least two rate hikes in 2027. m:…5316 m:…5348

In Asia, the call is for tech-linked currencies to lead: the Korean won, Chinese yuan, Singapore dollar and Malaysian ringgit, which outperformed in 2026 on AI export demand. Most Asian central banks are expected to finish their hiking cycles by the first quarter of 2027, and the People's Bank of China is expected to cut rates by 10 basis points in 2027, though it also raised the foreign-exchange deposit reserve requirement from 4% to 6% in November, a move that suggests the bank wants any appreciation to stay orderly. The Reserve Bank of India is expected to keep tightening gradually, with a base case of 50 basis points of hikes over the next six months. m:…5321

Latin America is where the outlook gets blunt. Banxico cut its policy rate to 6.25% in November, leaving the peso with record-low protection of 225 basis points over the Fed, and ING expects the Mexican currency to stay vulnerable. Brazil is the other side of the trade: high real rates support a recovery in the real, with the policy rate expected to reach 15.00% by the end of 2027. In Central and Eastern Europe, the Hungarian forint is the preferred currency at 5.50%, the Polish zloty's outlook has shifted to mildly negative, and Serbia's central bank hiked rates to 6.0% in November. m:…5322 m:…5320

Seven ways the calm breaks

Then there is what could break the calm. ING names seven tail risks, the first being a decisive unwind of the AI trade, which could become the overarching driver of foreign exchange in 2027. Contained weakness in tech shares would weigh only moderately on the dollar, ING says, but a broader selloff that triggers financial instability would be a different event entirely. m:…5317

The other risks are familiar but sharper than usual. The French presidential election in April and May 2027 is the biggest downside risk for the euro, though the European Central Bank's Transmission Protection Instrument backstop can prevent French budget trouble from spreading. Nearly 60% of US Treasury issuance is now in short-term bills, which ING says could revive financial repression if yields rise sharply and the Treasury tries to suppress them. And a carry-trade unwind would favour the yen and the Swiss franc at the expense of high-yielding currencies. m:…5317

If volatility does return, ING expects equities, not interest rates, to be the trigger, a break from recent years, when rate cycles did the moving. Markets have built up a high tolerance for political and geopolitical headlines, ING says, and that tolerance is itself a risk: the start of the Iran war in February 2026 still caused significant currency volatility. m:…5318