Cartoon by Daniel Boris

Weak dollar policy to persist into 2026

BY JOSEPH BRUSUELAS

The Real Economy Blog: From January 1 to December 17, the dollar lost 9.5% of its value, with most of those losses occurring in the first six months of the year.

Pushing down the dollar’s value has been a policy priority for the administration as it sought in part to make exports more attractive.

We anticipate that the next few years will see a secular bear market for the dollar as investors diversify away from U.S. dollar-denominated securities and central banks reduce their Treasury holdings.

Given the risk to the outlook via inflation, a weak dollar policy carries its own risks and that is going to be part of the global economic narrative over the next few years.

While it is critical that one does not confuse diversification away from the dollar with de-dollarization—that is simply not in the cards given the reserve currency role of the greenback—the case for a stronger dollar at this time is weak at best.

But weakening the dollar, despite all of its strengths, is no small feat. How did it happen?

In our opinion, the first six months of 2025 were dominated by a string of U.S. policy decisions that undermined confidence in the U.S.

The U.S. government withdrew from the World Trade Organization, ended nutrition and medical assistance to the developing world, and cut off research grants to leading universities and organizations.

In addition, the government seemed determined to abdicate its postwar international role of promoting peace and helping our trading partners. Instead, it enacted tariffs and alienated allies.

Currencies are two-sided estimates of value; an exchange rate consists of a numerator and a denominator. So, there will always be ups and downs to the value of the dollar because of changing perceptions of the U.S. economy and the returns on its financial and real assets compared with those of its trading partners.

As for Europe and Japan, both major purchasers of U.S. public debt, we show a simultaneous depreciation of the dollar versus the euro and yen during the first five months of 2025.

Since then, and while the euro has continued to appreciate against the dollar, the yen has suffered from changing perceptions of Japan’s political environment and its monetary policy.

Finally, while U.S. policy changes continued into the second half, there was also a sense of inevitability that most likely slowed the pace of dollar depreciation, particularly against the euro.

While our emerging-market trading partners will eventually find other sources for U.S. exports and while high-income U.S. consumers will maintain their demand for imports, the financial sectors among the developed economies will be monitoring the U.S. commitment to the global economy.

The takeaway

The dollar lost 10.7% of its value in the first six months of 2025, decelerating to a 10% annualized rate of decline by mid-December.

In the second half of the year, the global financial markets appear to have resigned themselves to the constant stream of disruptive events coming out of the U.S., while the politics of fiscal dominance in Japan pushed the yen’s value lower.

The next few years will most likely observe a slow drift toward a weaker dollar absent an exogenous event that would send capital into dollar-denominated positions seeking safety.