Why the Dollar Isn’t as Strong as It Used to Be

The U.S. dollar could see a bit more weakness in 2026, analysts say, continuing its decline after President Donald Trump’s tariff plans in April surprised markets.

The dollar weakened as much as 10% this year against a basket of foreign currencies, though it’s retraced some of those losses recently and is now down 7% year-to-date.

The drop was far from the doomsday “de-dollarization” scenarios that some floated after April—global trade and markets still rely on the U.S. dollar. It did, however, mark an end to the dollar’s steady gains over the last decade, when global investors swept into U.S. stocks and bonds and used dollars to buy them.

“We project further dollar weakness but at a slower pace than 2025, leaving the trade-weighted dollar 10% weaker by end-26,” George Saravelos, global head of FX research at Deutsche Bank. “If these forecasts materialize, they will confirm that this decade’s unusually long dollar bull cycle is over.”

There are reasons for the dollar to strengthen—after all, global investors need dollars if they want to buy U.S. tech stocks. But the world is “so heavily exposed to U.S. equities that sustaining elevated inflows will be challenging,” Saravelos wrote.

That lopsidedness could help drive investors elsewhere in the world, TD Securities analyst Jayati Bharadwaj wrote in a note to clients.

“For the USD to benefit from a strong U.S. outlook, you need the outlook for the rest of the world to materially deteriorate,” Bharadwaj wrote, adding that instead the global economy “has been resilient and held up much better than feared under tariff uncertainty.”

The weaker dollar means U.S. travelers’ money may not go as far abroad, while U.S. companies pay more to import goods. 

However, a weaker dollar is better news for U.S. exporters because their goods become cheaper abroad—in line with Trump’s priority to reduce U.S. trade deficits. Trump ultimately “needs a weaker USD to sustainably shrink the trade deficit,” Bharadwaj wrote.

The Fed’s ongoing interest rate cuts aren’t helping the dollar, since U.S. debt becomes a little less attractive when it pays less interest. The dollar may regain its luster once the Fed pauses on rate cuts, Wells Fargo Chief Economist Tom Porcelli wrote recently.

“We expect the greenback to broadly strengthen in the back half of next year as the Fed ends its easing cycle and de-dollarization talk diminishes,” he wrote.

Still Dominant

This year’s narrative of de-dollarization mostly ended up being talk, analysts say, seeing little sign of a shift away from the U.S. dollar’s dominance in finance since the end of World War II.

“The structural foundation of dollar dominance remains intact, supported by deep and liquid markets, the global reach of U.S. financial institutions, and an unmatched supply of safe assets,” Marcello Estevão, chief economist at the Institute of International Finance, wrote in a research note.

Safer assets such as highly rated debt—which the U.S. government issues plenty of—are critical vehicles for global pension funds or insurance companies to park cash and earn some interest. There is little sign that demand is waning among private foreign investors for U.S. Treasury bonds, Estevão noted. The dollar also remains the dominant currency in global payments.

The recent rally in gold prices has stoked some talk of de-dollarization, since global central banks are increasingly holding more gold in their coffers. Still, Estevão wrote, the rise in gold prices appears to have “mechanically lifted” how large a portion gold makes up in central banks’ portfolios, chipping away at the share of their dollar assets.

The recent “gold accumulation has not come at the expense of dollar holdings” at most central banks, even if countries like China or Russia have diversified away from it, Estevão said.

Still Some Caution

There are plenty of myths surrounding the supposed de-dollarization, TD Securities’ Bharadwaj wrote. Still, she wrote, some investors may remain cautious that the dollar will weaken further, eroding the value of any U.S. dollar assets in their portfolios.

The dollar’s longstanding status as a safe haven is “strained” due to less predictable U.S. policymaking, she wrote.

“The U.S. is no longer shielded from exogenous global macro shocks but is instead the emanating source of them,” Bharadwaj wrote, flagging ongoing tariff uncertainty and Trump’s squabbles with the Fed as two risks.

Even if investors don’t react negatively, they still have a strong incentive to shield themselves against dollar weakness, Bharadwaj wrote. That’s because the Fed’s rate cuts are making it cheaper for investors to buy instruments that hedge against dollar risks, she noted.

While European investors have already done a significant amount of hedging, there’s room for funds in other regions to do so, Deutsche Bank’s Saravelos wrote. It’s a question that analysts are watching closely to see if more dollar weakness is ahead.

“Our conversations suggest that the hedging decisions are still in flux,” Saravelos wrote, adding that “the outlook for hedging flows errs dollar bearish.”