The U.S. dollar had a rough year. What's next in 2026?

Core Insights - Currency markets are influenced more by inflation's implications for growth, policy, and predictability than by inflation itself [1] - The U.S. inflation landscape is characterized by uneven goods inflation, persistent high rents, and tariffs impacting prices [2][3] - The CPI report indicates a year-over-year headline inflation of 2.7% and core inflation at 2.6%, which is below expectations [6] Economic Context - The dollar's performance in 2025 reflects a shift in market expectations regarding U.S. economic dominance and asset premium [4][9] - The dollar experienced an 11% decline against major currencies in the first half of 2025, marking its worst performance since the early 1970s [10] - Political and economic uncertainties, including new tariffs and changing growth expectations, have led to a reassessment of the dollar's strength [11][12] Market Reactions - Foreign investors, holding over $30 trillion in U.S. assets, began hedging against currency risks as the dollar weakened [13] - By mid-2025, the dollar stabilized but did not recover, indicating a potential long-term shift in market dynamics [14][15] - The CPI report did not provide a clear signal for recovery, as inflation remains uneven and uncertainty persists [16] Future Outlook - Strategists predict further dollar weakness due to slowing U.S. growth and narrowing interest-rate differentials, while others suggest a potential "flight to safety" could favor the dollar [18] - The decline of the dollar reflects a broader concern about the sustainability of American economic exceptionalism [20]