What a Weaker US Dollar Means for Investors in 2026 and Beyond

Key Takeaways

• The US dollar weakened sharply in 2025, driven by fiscal concerns and reduced confidence in policy.
• Despite the decline, the dollar remains overvalued relative to most global currencies.
• Non-US assets offer better value and currency appreciation potential for US-based investors.

The world’s reserve currency is on track for its weakest year in more than a decade. The US Dollar Index (DXY), which measures the dollar’s value against a basket of major currencies, fell nearly 10% through September, with even steeper declines against certain individual currencies.

Through September, the dollar depreciated 13.5% against the euro, 13.9% against the Swiss franc, and 6.4% against the yen, alongside a 5.6% decline versus a basket of major emerging-markets currencies.

What Caused the Dollar’s Selloff in 2025?

The selloff reflected a mix of persistent structural pressures and new vulnerabilities that intensified in 2025. Long-standing concerns included rising US debt burdens—exacerbated by the “Big Beautiful Bill”—and the gradual erosion of the US growth premium, particularly as tariff uncertainty clouded the economic outlook.

Meanwhile, new threats emerged. Global investors began increasing hedging of their US exposures, reversing years of reduced hedging when confidence in “US exceptionalism” was stronger. Policy uncertainty—ranging from questions about Federal Reserve independence to market sensitivity around tariff headlines—further weighed on sentiment.

Together, these factors drove one of the most notable episodes of dollar weakness in recent memory.

Heading into 2026 and beyond, global investors face three pivotal questions that will shape how portfolios should be positioned.

1. Is the US Dollar in Structural Decline?

While the dollar’s recent decline has been pronounced, the evidence doesn’t point to a full-blown structural collapse. Much of the weakness reflects cyclical and policy-driven forces—slowing US growth, narrowing rate differentials, persistent fiscal deficits, and elevated inflation. External factors such as shifting global capital flows, renewed hedging of dollar assets, and waning confidence in US macroeconomic policy have also added pressure.

That said, important structural supports remain intact. The dollar continues to serve as the world’s dominant reserve and settlement currency, and it retains its safe-haven appeal during periods of market stress.

In our view, the greenback is likely entering a more prolonged phase of cyclical weakness—not a secular decline.

2. Has 2025’s Decline Made the Dollar Attractive Again?

The simple answer: not quite. Although the sharp decline has grabbed headlines, a broader historical perspective reveals that the dollar remains elevated. Following a multiyear rally, the recent depreciation has improved valuation relative to the start of the year, but the dollar still trades at a premium versus most peers.

Among the 34 major developed- and emerging-markets currencies we track, only nine are currently more overvalued than the US dollar—suggesting that while cheaper, the greenback is far from “cheap.”

3. How Should Investors Position Their Portfolios?

For US-based investors, this is an opportune time to add more exposure to non-US markets—not only because many are priced to deliver superior risk-adjusted returns but also because foreign-currency exposure now offers greater potential for appreciation compared with the US dollar. A modest reallocation from US to non-US assets can both diversify portfolios and hedge against further dollar weakness.

For investors outside the US, exposure to US dollars may be large in portfolios with bigger equity allocations, given the global dominance of US stocks. Here, managing dollar exposure requires balancing hedging costs and diversification benefits. Hedging converts volatile exchange-rate movements into steadier returns driven by short-term interest rate differentials with the US. These “foreign-exchange hedge returns/costs” vary widely—from near zero for UK investors to roughly 4% hedging cost per year for investors in Japan or Switzerland, where interest rates remain far below US levels. By contrast, investors in higher-rate markets such as South Africa can earn positive hedge returns.

What Could Replace the Dollar?

Looking longer term, even if the dollar continues to weaken, identifying a clear alternative remains challenging. Gold has gained popularity as a perceived hedge, though its lack of cash flow complicates valuation. Its price volatility and periodic bouts of speculative fervor also make it a less predictable option.

The Japanese yen appears attractively valued relative to the dollar, but substituting US equity exposure with Japanese equities solely for currency reasons is rarely practical, given US market’s breadth, liquidity, and heavy weighting in global benchmarks (around 70%). Fully hedging that exposure into a third currency, such as the yen, would also add operational complexity and additional cost.

A measured approach to currency hedging therefore makes sense for investors in countries with broadly comparable interest and inflation rates to the US, including the UK and Australia. This means considering some degree of currency hedging. For emerging-markets investors—such as those in South Africa—partial hedging can also be attractive if local inflation is relatively stable. For investors in low-rate regions like Japan or the euro area, where hedging remains expensive, or where there may be a lack of availability of hedged share classes, a mix of reduced US exposure and selective, modest hedging is likely the most prudent path.

What’s Next for the Dollar?

The US dollar’s weakness in 2025 likely signals a turning point in its long cycle of strength—though not the end of its global dominance. For investors, this shift should be seen as an opportunity: a reminder that global diversification may play a more important role in portfolio returns going forward than it has in the recent past, as currency and regional exposures once again become meaningful sources of value.