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

Investors and analysts may remember 2025 as the year the world blinked — at the U.S. dollar. For much of 2025, the story was one of markets rethinking whether the United States still deserved the premium it had enjoyed for more than a decade, in a bull run that seemed unstoppable until it suddenly wasn’t.

Rewind to January, 2025

The dollar began the year near historic highs, still buoyed by a 10-year bull market that had been fueled by strong economic growth, the world’s deepest capital markets, and higher interest rates than much of the developed world. But that narrative unraveled quickly. From January through June, the dollar fell roughly 11% against a basket of major currencies—its worst first-half performance since 1973 — formally ending a long era of dollar dominance.

What changed was less about monetary policy and more about predictability and expectations. After the 2024 election, markets largely assumed another round of U.S. outperformance, supported by strong capital inflows, ever-hungry U.S. consumers, and a politically independent Federal Reserve. That view cracked in the spring, when new tariff announcements and broader policy uncertainty forced investors to rethink the outlook for growth, inflation, and public debt all at once. The result was a rapid repricing of U.S. assets — and of the dollar itself.

Crucially, the dollar’s slide came even as the Fed resisted signaling imminent rate cuts, insisting on a “wait and see” approach. Markets then began to price a newer story: slower U.S. growth, eventual lower rates, and perhaps shrinking political and governance advantages relative to Europe and other developed economies. Sentiment and narrative themselves became issues, arguably; once investors began to believe the U.S. would no longer be the clear standout, the dollar seemed less attractive.

By midyear, the dollar found a floor

Capital flows followed the new story. Foreign investors hold over $30 trillion in U.S. assets, much of which has, historically, been left relatively unhedged — an implicit bet on continued dollar strength. As the currency weakened in early 2025, those same investors began adding currency hedges, effectively selling dollars into the market. And given the scale of U.S. asset ownership, even modest shifts in hedging behavior can create significant downward pressure.

Politics appeared to add another layer of risk, however difficult to quantify. After the 2024 election, markets had largely assumed continuity — not just in economic policy, but in institutional norms, including a Federal Reserve insulated from political pressure. By spring, those same assumptions looked shakier. Tariff announcements, policy volatility, and public debates over the Fed’s independence introduced additional uncertainty. For foreign investors in particular, the question was no longer simply whether U.S. growth would slow, but whether the rules of the game were becoming less predictable.

By midyear, the dollar stopped falling, but it didn’t recover, either. Stronger-than-expected economic data in July and signs that tariffs had yet to dampen activity as much as some analysts feared helped to stabilize sentiment, but the USD has still spent much of the second half of the year hovering near the 12-month lows. That suggests the repricing of U.S. dominance has stabilized, rather than reversed.

So, is the dollar screwed in 2026, too?

The question for 2026 is whether global markets finish the recalibration — or decide the U.S. actually is, for better or worse, the world’s least risky place to be. Looking ahead, some strategists, including Morgan Stanley $MS, expect further declines as U.S. growth slows, interest-rate differences shrink, and investors across the globe continue to hedge their exposure. Others argue that renewed trade tensions or a sharper U.S. slowdown could cue a “flight to safety” and revive demand.

Of course, all of this currency data can seem abstract until you consider that your Italian vacation probably just got a bit pricier — along with your flights, hotel stays, and whatever premium European leather goods you hoped to bring home. That’s if you’re lucky, though. For most households, the effect is simply a subtle increase in prices — a few dollars here, a few dollars there, perhaps fewer bargains anywhere — that make everyday life feel just a little more expensive.