From rebound to retreat: The dollar’s rocky road ahead

After a difficult year, the U.S. dollar is showing tentative signs of stabilisation, but investors largely expect the broader downtrend to resume in 2026 as global growth improves and the Federal Reserve moves closer to further monetary easing. According to a Reuters report, the dollar slid more than 9% against a basket of major currencies in 2025, marking its weakest annual performance in eight years.

The Reuters analysis noted that the currency’s decline was driven by mounting expectations of Federal Reserve rate cuts, a narrowing gap between U.S. interest rates and those in other major economies, and persistent concerns surrounding America’s fiscal deficits and political uncertainty. A softer rate environment in the U.S. typically weighs on the dollar, as lower yields reduce the appeal of dollar-denominated assets for global investors.

While the greenback has staged a modest rebound in recent months — with the dollar index rising about 2% from its September low — it remains expensive by longer-term measures. Reuters cited data showing that the real broad effective exchange rate of the dollar stood at 108.7 in October, down from a record high of 115.1 in January, suggesting the currency continues to trade at elevated levels relative to global peers even after the correction.


Expectations of further dollar weakness in 2026 are also linked to a shrinking U.S. growth advantage. Reuters highlighted that economic momentum is improving across other major regions, supported by Germany’s fiscal stimulus, policy support in China and a gradual recovery across the euro zone. As growth differentials narrow, the structural support that has buoyed the dollar in recent years is expected to weaken.

Diverging central bank policies could further pressure the currency. While the Federal Reserve is widely expected to continue cutting rates, other major central banks may hold policy steady or even tighten, reducing the dollar’s yield advantage. Reuters also pointed to upcoming leadership changes at the Fed, which markets believe could reinforce a more dovish policy stance. In contrast, the European Central Bank is expected to keep rates unchanged through much of 2026, with the possibility of a hike not entirely ruled out.

That said, near-term volatility cannot be ruled out. Reuters noted that strong investor interest in artificial intelligence-led growth and continued capital inflows into U.S. equities could lend temporary support to the dollar. In addition, recent fiscal measures and the resumption of full government operations may offer short-term relief early in the year.

However, analysts cited by Reuters cautioned that these factors are unlikely to offset the broader structural forces weighing on the currency. Over the longer term, the dollar’s direction in 2026 is expected to be shaped by the interaction of Fed policy, global growth convergence and shifting investor sentiment — with the balance of risks still tilted towards gradual weakness rather than a sustained recovery.

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