Why the U.S. dollar got weaker in 2025 — and what it means for 2026

Core Insights - The year 2025 marked a significant shift in the perception of the U.S. dollar, as markets began to question the premium the dollar had enjoyed for over a decade [1] Group 1: Dollar Performance - The U.S. dollar started 2025 near historic highs, supported by a decade-long bull market characterized by strong economic growth and higher interest rates compared to other developed nations [2] - From January to June 2025, the dollar experienced an approximately 11% decline against a basket of major currencies, marking its worst first-half performance since 1973 [2] Group 2: Market Sentiment and Expectations - The decline in the dollar was driven more by changes in predictability and market expectations rather than monetary policy adjustments [3] - Following the 2024 election, markets initially anticipated continued U.S. outperformance, but this view shifted due to new tariff announcements and increased policy uncertainty, leading to a rapid repricing of U.S. assets and the dollar [3][4] Group 3: Capital Flows and Investor Behavior - By mid-2025, the dollar found a floor as foreign investors, who hold over $30 trillion in U.S. assets, began to hedge against currency risk, selling dollars into the market [5] - The scale of U.S. asset ownership means that even minor changes in hedging behavior can exert significant downward pressure on the dollar [5] Group 4: Political Uncertainty - Political developments added another layer of risk, as markets had initially expected continuity in economic policy and institutional norms following the 2024 election [6] - However, tariff announcements and debates over the Federal Reserve's independence introduced uncertainty, leading foreign investors to question the predictability of U.S. economic governance [6]