Why the Dollar Isn’t as Strong as It Used to Be

Core Viewpoint - Analysts project that the U.S. dollar will continue to weaken, potentially by 10% by the end of 2026, following a decline initiated by President Trump's tariff plans in April [1][3]. Group 1: Dollar Weakness and Economic Impact - The dollar has weakened by as much as 10% this year against a basket of foreign currencies, currently down 7% year-to-date [1][2]. - A weaker dollar affects travel costs, import prices, and investment returns for U.S. households and investors, reshaping portfolios and global trade dynamics [3]. - The Federal Reserve's ongoing interest rate cuts contribute to the dollar's weakness, making U.S. debt less attractive [7]. Group 2: Global Economic Context - Despite the dollar's decline, global trade and markets still heavily rely on the U.S. dollar, indicating that the narrative of "de-dollarization" is largely overstated [2][9]. - The structural foundation of dollar dominance remains intact, supported by deep and liquid markets and the global reach of U.S. financial institutions [10][11]. - The recent rally in gold prices has led to discussions about de-dollarization, but central banks' gold accumulation has not significantly reduced their dollar holdings [12][13]. Group 3: Investor Sentiment and Hedging - Some investors remain cautious about further dollar weakness, which could erode the value of U.S. dollar assets in their portfolios [14]. - The Fed's rate cuts are making it cheaper for investors to buy instruments that hedge against dollar risks, indicating a potential shift in investment strategies [16]. - Analysts are closely monitoring hedging decisions, with indications that the outlook for hedging flows is leaning bearish on the dollar [17].