Eric Sepanek
SBC Founder
Eric Sepanek is the founder of Scottsdale Bullion & Coin, established in 2011. With extensive experience in the precious metals industry, he is dedicated to educating Americans on the wealth preservation power of gold and silver.
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The U.S. dollar faced a growing list of headwinds in 2025, from rising fiscal pressures and political uncertainty to shifting geopolitical dynamics and changing global capital flows. None of these forces dismantled the dollar’s role in the global system, but together they were enough to weigh on performance and raise fresh questions about the dollar’s longer-term trajectory.
While 2025 was defined by trade uncertainty, 2026 has been marked by the geopolitical crisis in Iran. This conflict has significantly accelerated the move toward a multipolar financial system as international investors seek safety outside of traditional dollar-denominated assets.
Thus far into 2026, most of the challenges have either sustained or increased in pressure. The dollar’s once-central role in the global economy as a foundation for trade, debt, and international reserves is facing pushback the world over. The retail market is taking notice as central banks and institutional investors question the future of the dollar as the world’s reserve currency.
Understanding how the dollar will perform in 2026 is essential for investors who want to put their wealth in the best position to succeed.
How the U.S. Dollar Performed in 2025
Market headlines often focus on a single index when discussing the value of the dollar, which can oversimplify a relatively complex dynamic. In reality, experts have various metrics to gauge the USD’s strength for a more holistic picture. Generally, the dollar’s true performance is best understood when market-based, trade-weighted, and inflation-adjusted gauges are viewed side by side.
U.S. Dollar Index
The U.S. Dollar Index (DXY) tracks the dollar’s value against a basket of six major developed-market currencies, such as the euro, yen, and British Pound. This is among the most commonly cited barometers for the dollar’s value, reflecting global capital flows, interest-rate differentials, and investor sentiment toward the U.S. relative to other developed economies.
In 2025, DXY fell from roughly 109 at the start of the year to about 98 by year-end, a decline of 11 points, or approximately 10%. This move signals a meaningful weakening of the dollar against major developed-market peers, which mirrors the shift towards a multipolar economy with several competing fiat currencies.
Fed Broad Trade-Weighted Dollar Index
The Federal Reserve’s Nominal Broad U.S. Dollar Index also weighs the greenback’s relative strength against foreign currencies, but includes a much broader basket. This broad dollar index includes both developed and emerging economies that actually trade with the U.S., with each currency weighted based on how much trade occurs with that country.
On this basis, the dollar also weakened in 2025. The index declined from roughly 130 in early January to around 120 by December, a drop of 10 points, or about 7.7%. This broader measure shows the dollar losing ground against the currencies most relevant to U.S. commerce, reinforcing that the decline went beyond just the world’s largest economies.
Real Broad Dollar Index (REER)
The Real Effective Exchange Rate (REER) compares the dollar to other currencies,
but adjusts for inflation differences between the U.S. and its trading partners.
This helps show how the dollar is performing in practical terms, giving a clearer view of its actual purchasing power.
After accounting for inflation, the dollar still contracted in 2025. The real broad dollar index fell from approximately 122 in January to about 114 by year-end, a decline of about 8 points, or roughly 6.5%. For investors, this confirms the dollar’s 2025 weakness was not merely nominal, but reflected a genuine loss of real exchange strength and relative purchasing power.
What Weighed on the Dollar in 2025
Several forces combined to pressure the U.S. dollar in 2025. Trade and policy uncertainty played a central role, as shifting tariff headlines repeatedly altered growth expectations. The Fed directly linked changes in trade policy to declines in the broad, trade-weighted dollar, noting weakness across both developed and emerging-market currencies.
At the same time, confidence in U.S. growth exceptionalism softened. As highlighted by major financial institutions, the dollar increasingly traded on relative growth expectations rather than interest-rate levels alone. Fiscal and external imbalances also resurfaced, with rising deficits reducing appetite for unhedged dollar exposure, a dynamic discussed in official U.S. Treasury and International Monetary Fund reporting.
Another structural factor was increased FX hedging by foreign investors. The Bank for International Settlements noted that higher hedge ratios can generate sustained dollar selling even when capital remains invested. Entering the year from an elevated starting point, the dollar proved vulnerable to these pressures, many of which persisted into year-end, setting the stage for 2026.
The Forces Expected to Weigh on the Dollar in 2026
For the rest of the year, most major institutions expect the U.S. dollar to face continued pressure as a mix of structural and cyclical forces remains in play. While none of these challenges alone is decisive, together they create a less supportive backdrop for the currency than in recent years.
1.  Shrinking U.S. Interest Rate Advantage
A key theme for 2026 is the expected narrowing of U.S. interest rate advantages. When the Fed cuts rates, the dollar often weakens because its yield premium over other currencies shrinks, a dynamic highlighted in 2026 strategist discussions. In 2025, analysts noted the dollar’s drop was tied to shifting rate expectations rather than current policy, a trend that is expected to carry through 2026.
2.  Growing Debt & Deficits
The U.S. fiscal situation remains dire as the national debt stands at $39 trillion, and the federal budget is overextended by $2 trillion. These domestic fiscal struggles reflect poorly on the U.S. dollar abroad, contributing to a decline in global confidence. In fact, the credit rating of the U.S. has been revised down by all three major credit rating agencies, which undermines the demand for greenbacks across the world.
3.  Long-Term Elevated Valuation
Despite experiencing some alarming weakness over the past few years, the dollar technically remains above historical averages. Instead of shining a positive light on the USD’s future, however, this relative strength could mean there’s even more room to fall. J.P. Morgan estimates the dollar is roughly 10% above its fair market value, indicating a potential for further declines, independent of market conditions.
4.  Fed Independence and Leadership Concerns
President Trump’s repeated attacks on Fed Chairman Jerome Powell have raised concerns about the central bank’s ability to remain independent of political influence. In turn, this has caused many experts to raise alarms about the dollar’s safe-haven status under such political pressure. The Financial Times reports that more than 90% of economists expressed concern about the dollar’s position in the world economy amid these threats.
5.  Heated November Midterms Add Volatility
With the November Midterms now less than six months away, there are fears about the dollar’s steadiness during the fraught political faceoff. With a considerable number of Senate and House seats up for grabs, political tension is intensifying, driving increased hedging behavior and risk aversion that continues to undercut the USD’s stability.
Even if the midterm shakeup goes smoothly, the political inertia behind fiscal recklessness is likely to persist.
6.  Slowing Relative Growth Advantage
The U.S. economy tends to dominate global growth, but mounting fiscal pressures and political division threaten to loosen that relative output advantage. When foreign economies start to outpace the U.S., the dollar’s historical growth premium shrinks. J.P. Morgan sees the interest in foreign economies continuing to grow, putting pressure on the dollar.
7.  Rising Cost of Servicing U.S. Debt
As the U.S. debt rises exponentially with no meaningful pushback, the associated interest costs are compounding incrementally. Already, the federal budget allocates about $1 trillion to debt servicing expenses, making it one of the largest single line items in the annual budget. Rising interest costs mean more debt issuance, increasing the supply of dollars and putting pressure on its long-term value, an important consideration for investors in 2026.
8.  Persistent De-Dollarization Trends
The global exodus from the dollar is no longer a theoretical risk; it is a structural reality accelerating through mid-2026. This trend is largely fueled by the continued “weaponization” of the dollar, as the U.S. leverages its reserve status to exert geopolitical pressure on both adversaries and trading partners.
- China’s Strategic Pivot: As of April 2026, the People’s Bank of China has added to its gold reserves for 18 consecutive months. By aggressively reducing U.S. Treasury holdings in favor of physical gold, China has pushed its official holdings to over 2,322 tonnes—roughly 9% of its total reserves—marking a significant move toward financial autonomy.
- The European Shift: The desire for a multipolar currency system is no longer limited to emerging markets. In May 2026, France signaled its own move toward de-dollarization, reflecting a growing consensus among major Western economies that dependence on a single reserve currency carries unacceptable geopolitical risks.
- Geopolitical Catalysts: The 2026 conflict in Iran has further strained the dollar’s global dominance. The resulting volatility in energy markets and the strategic threat to the Strait of Hormuz have prompted nations to seek decentralized alternatives, contributing to what some analysts describe as a “structural loss of confidence” in traditional dollar-denominated assets.
- Record Central Bank Demand: Global central banks purchased 244 tonnes of gold in the first quarter of 2026 alone, a 3% increase over the previous year. This sustained demand highlights a broader strategic shift as sovereign entities prioritize hard assets over fiat-based debt.
Rather than a temporary cyclical dip, these forces indicate a long-term transition where the conditions supporting sustained dollar strength are fundamentally weakening. For investors, this shift underscores why diversification into assets like gold has become a cornerstone of long-term portfolio positioning in 2026.
👉 Related Read: De-Dollarization 101: What to Know About the Global Shift Away From the Dollar
9.  Stronger Commodity Prices
Periods of rising global commodity prices historically coincide with dollar weakness, as commodities, often priced in dollars, become more attractive when the currency loses value. With gold and silver hitting record highs in early 2026, the dollar faces strong headwinds from elevated commodity values and the resulting investment demand. The dollar’s falling real exchange value is reflected in its relative weakness to many of the leading foreign currencies. Beyond just a reaction to dollar weakness, the 2026 rally in gold and silver is being driven by persistent supply-demand deficits. As central banks continue to diversify away from Treasuries, the demand for physical assets is reaching a fever pitch that the current supply is struggling to meet.
The Dollar’s Bleak Outlook in 2026
Taken together, the consensus is that the U.S. dollar is moving through 2026 with fewer clear tailwinds than in prior cycles. It remains central to the global system, but rising debt, persistent deficits, shifting global demand, and a narrowing growth advantage are creating a less supportive backdrop. These are not short-term pressures. They reflect longer-term structural changes that continue to weigh on the dollar’s outlook.
For investors, that shift matters. The dollar hasn’t broken, but the conditions supporting sustained strength are weakening. As a result, diversification becomes more important, with assets less tied to dollar performance, particularly gold, playing a larger role in long-term portfolio positioning.