The dollar is expected to remain weak in 2026, after its worst decline in years, amid a slew of factors that are keeping market watchers on edge.
The currency has borne the brunt of geopolitical conflicts and the US-China tariff war, which has reshaped trade alliances and uncertainty in America, the world's biggest economy.
“The fate of the US dollar will continue to be a big story in 2026,” said Gregor Hirt, chief investment officer at Allianz Global Investors. “We expect continued weakness in the currency, but a lower path than 2025.”
This would be “driven by inflation differential favouring Europe and political pressure on the US Federal Reserve”, he said.
Why dollar's strength matters
The US dollar, the world's biggest reserve currency, ended last year tumbling about 9 per cent against a basket of currencies for its worst showing since 2017. At one point it was down by 10 per cent.
A weaker greenback has wide-ranging effects. It influences everything from stock markets, commodities, exchange rates and investment returns to raising inflation that ups the prices of imports and goods.
Investors might seek other assets that are not reliant on the dollar. Consumers will not be able to stretch their spending power, most obviously while travelling.
Winning gold
There are assets that rise with the decline of the dollar – and perhaps the biggest beneficiary of this last year was gold, which rocketed through several highs and hit more than $4,549 per ounce last week.
The rise of precious metals was driven by the so-called debasement trade – the idea that fiat currencies lose purchasing power over time due to heavy debt, persistent deficits, loose monetary policy and financial repression, said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.
Central banks continued to accumulate gold as part of a broader effort to diversify away from the US dollar, analysts at Swiss financial firm Syz Group.
It said: “At the same time, heightened geopolitical and policy uncertainty, amplified by the recent US government shutdown, strengthened gold’s appeal as a safe-haven asset. Concerns of an artificial intelligence bubble also encouraged a rotation into defensive stores of value.”
Fed factor
One of the factors market watchers are keeping their eyes on is the drama at the Fed, whose actions have also influenced the dollar's performance.
After a years-long pause, the Fed finally slashed interest rates last year – three successive cuts of 25 basis points each – and analysts are forecasting one or two more this year.
Unlike gold, which has an inverse effect on the dollar, currencies weaken when interest rates are cut. This is true for all central banks, especially the Fed, Bank of England, European Central Bank and Bank of Japan – overseers of the world's four biggest reserve currencies.
Adding to the concerns is US President Donald Trump's displeasure with Fed boss Jerome Powell, whose term as chairman ends in May. Mr Trump – who renewed his attacks on Mr Powell this week – is expected to appoint an ally to the position.
Investors expecting 50 basis points of easing “has given the dollar short-term support as investors reconsider US policy”, said Vijay Valecha, chief investment officer of Century Financial in Dubai.
“The CME FedWatch tool now shows an 84 per cent chance that rates will stay the same in January, which is helping to keep demand for the dollar steady in the near term,” he said.
Stabilising agent?
Meanwhile, cryptocurrencies, dubbed the future of finance, may also play a role in the dollar saga, as their growth could have implications for core aspects of the financial system.
In particular, stablecoins – digital tokens pegged to a fiat currency, typically the dollar, and backed by reserve assets – have the potential to support the US currency.
In emerging markets, for instance, stablecoins could be used domestically as an alternative to local currency, broadening dollar access but challenging monetary control if domestic currency use declines, supporting the dollar, analysts at US asset manager BlackRock said in its 2026 Global Outlook.
“That allows competition with bank deposits or money market funds, which, if it occurred at scale, could meaningfully affect how banks provide credit to the broader economy,” it said.
Even Bitcoin, which practically wiped out its gains last year after Mr Trump returned to office, could revisit its highs this year, thanks to easier financial conditions, persistent exchange-traded fund inflows and, of course, a weaker US dollar, market experts have said.
