Dire year for dollar has little light at end of tunnel in 2026

A dismal year for the US dollar is ending with signs of stabilisation, but many investors believe the currency’s decline will resume next year as global growth picks up and the Fed eases further.

- SAQIB IQBAL AHMED

Four thousand US dollars are counted out by a teller at a bank in Westminster, Colorado.

The US dollar stumped more than 9% this year, against a basket of currencies, its worst showing in eight years, driven by expectations of Federal Reserve rate cuts, shrinking interest rate differentials with other major currencies, and as concerns about US fiscal deficits and political uncertainty swirled.

Investors broadly expect the dollar to weaken further as other major central banks stand pat or tighten policy and as a new Fed Chair takes charge — a change that is expected to herald a more dovish tilt for the central bank, in line with President Donald Trump's wishes.

The dollar typically falls when the Fed cuts rates as lower US interest rates make dollar-denominated assets less attractive to investors, reducing demand for the currency.

"The reality is we still do have an overvalued US dollar from a fundamental standpoint,” Karl Schamotta, chief market strategist at global corporate payments company Corpay, said.

Getting the dollar's trajectory right is important for investors, given the currency’s central role in global finance. A weaker dollar boosts US multinational earnings by increasing the value of overseas revenues when converted back to dollars, even as it enhances the attractiveness of international markets by providing an FX boost beyond the underlying asset performance.