Why the US Dollar Could Weaken, and What It Means for Investors

The Federal Reserve raised interest rates on September 16 for the first time since 2023. Its target range reached 3.75%–4.00%. [1][2]

The move came as the dollar's 2025 decline gave way to a steadier 2026. Higher US rates can support the currency, while borrowing needs and changing reserve preferences create longer-term pressures.

The case for renewed weakness depends on whether those pressures outweigh the dollar's advantages. Exchange-rate changes affect foreign-currency returns, company earnings and import costs.

How the dollar stabilized

The Fed's broad trade-weighted dollar index fell 7.4% in 2025, according to the New York Fed. The dollar lost 11.9% against the euro. [3] The steepest quarterly decline followed sweeping tariffs, as markets lowered their outlook for US growth relative to other economies. [4]

In 2026, the broad index rose 1.1% in the first quarter and was little changed overall in the second. [3][5]

The quiet quarterly result masked a reversal. The dollar initially weakened as conflict de-escalation reduced oil prices, then recovered as stronger US data widened expected interest-rate differentials. [5]

By October 16, the broad index stood at 121.40, about 6% below its January 2025 monthly average of 128.84. It was roughly back to its October 2025 monthly average of 120.76. [6][7]

Higher rates and haven demand support the dollar

The European Central Bank (ECB), by comparison, set its deposit rate at 2.50%, effective September 16. [8] The 10-year Treasury yield was 5.13% on October 21. [9]

Higher US yields can attract capital, but exchange rates also reflect what investors already expect. Changes in expected US interest rates relative to those elsewhere can move the dollar. [10] In September, Fed officials' median projections implied a 4.00%–4.25% target range at the end of both 2026 and 2027. [11]

These projections reflect policymakers' assessments of an appropriate policy path. If US inflation cools and expected rates fall faster than elsewhere, the dollar's yield support could weaken.

The US-Iran conflict provided support earlier in the year. Front-month Brent crude futures rose 94% in the first quarter, while the dollar gained against several energy-importing economies. Market participants linked some support to higher US export prices, given the country's position as a net energy exporter. [3]

The dollar also benefits from its established role in global finance. The Fed's 2025 review put its share of foreign-currency corporate debt issuance at roughly 60%, using data through 2024. [12] The scale and liquidity of US financial markets help sustain demand for dollar assets.

The haven role has limits. After the April 2025 tariff announcement, the dollar fell while Treasury yields rose, a pattern the ECB described as unusual during market stress. [13] The episode showed how uncertainty originating in US policy can weaken the currency even when yields increase.

Borrowing is growing faster than foreign Treasury holdings

The Congressional Budget Office (CBO) estimates the fiscal 2026 deficit at $1.993 trillion, up $218 billion from 2025. Net interest on the debt reached $1.143 trillion, an increase of 11%. [14]

In its February baseline, CBO projected debt held by the public rising from about 100% of GDP in 2026 to 120% by 2036. [15] The baseline assumed the 10-year Treasury rate would average 4.3% over 2026–2036. [16]

An October scenario raised all interest rates 1.5 percentage points above the baseline while holding other economic variables unchanged. Debt reached 133% of GDP in 2036 under that scenario. [16]

Total federal debt stood at $40.40 trillion on October 19, up about $2.4 trillion in a year. That total included $32.53 trillion held by the public, with the remainder held in government accounts. [17]

Foreign Treasury holdings have grown much more slowly. They totaled $9.33 trillion in August 2026, compared with $9.25 trillion a year earlier. Foreign official holdings, mostly central banks, fell $164 billion to $3.76 trillion, while private foreign holdings increased. [18]

Foreigners' share of debt held by the public fell from roughly 31% to 29% over the same period, by Wealthion's calculation. [17][18] The calculation matches month-end holdings with publicly held debt. Changes in holdings can reflect valuation effects, so they are not a direct measure of net purchases. [19]

The US also ran a $246 billion current-account deficit in the second quarter, equal to 3.0% of GDP. [20] The current account records trade, income and transfers; a deficit reflects the economy's reliance on financing from abroad. Federal borrowing, by comparison, is financed by both domestic and foreign investors.

Heavy borrowing can weigh on the dollar if it damages confidence in US assets. It can also raise yields and attract capital, as historical Federal Reserve research illustrates. [21]

Reserve diversification does not translate directly into dollar selling

According to the International Monetary Fund (IMF), the dollar accounted for 56.7% of global foreign-exchange reserves in the second quarter of 2026. The euro's share was 20.6%. [22] The IMF's Currency Composition of Official Foreign Exchange Reserves (COFER) data exclude gold. [23]

A falling share does not necessarily mean reserve managers are selling dollars. The IMF said dollar holdings were largely unchanged in the quarter, while euro holdings increased. [22]

Central banks have also continued to buy gold. Their net purchases totaled 863 tonnes in 2025, after 1,092 tonnes in 2024, according to the World Gold Council. [24] They added 289 tonnes in the second quarter of 2026. [25]

The World Gold Council's 2026 survey received 76 responses. Of the 73 banks answering the dollar question, 74% expected its share to be lower in five years. The question included gold in total reserves. [26]

Gold's growing reserve weight also reflects its price. The ECB's gold-inclusive measure put bullion at 27% of official reserves at the end of 2025. That exceeded the euro's 15% and US Treasuries' 22%, mainly because higher gold prices increased the value of existing holdings. [13]

Confidence in US policy matters

Trade policy and central-bank independence also affect confidence. In February, the Supreme Court ruled that the emergency-powers law used for the administration's broad tariffs did not authorize tariffs. [27] CBO estimates roughly $130 billion in refunds helped push customs receipts down 11% in fiscal 2026. [14]

Kevin Warsh, nominated by President Trump, became Fed chair on May 22. [28] In June, the Supreme Court allowed Fed Governor Lisa Cook to remain in office while litigation over the President's removal attempt continued. [29]

The Fed unanimously approved September's rate increase. [1] Data released on October 14 showed consumer prices rising 3.7% in the year to September, with energy prices up 20.4%. [30]

For the dollar, the issue is whether investors trust monetary policy to respond to inflation independently of political pressure.

How a weaker dollar affects different assets

A weaker dollar changes both the value of investments expressed in dollars and the financial conditions facing businesses. The effects differ across assets.

In a 2023 study, the Bank for International Settlements (BIS) found that commodity prices and the dollar had increasingly moved together. It linked the change partly to unusual shocks and partly to the US emergence as a net energy exporter. [31] The first-quarter 2026 rise in both oil and the dollar illustrates why the usual inverse relationship cannot be assumed. [3]

Gold's currency effects also depend on the holder's home currency. The World Gold Council linked its February 2026 gain partly to dollar weakness. Yet gold fell in local terms in India and China that month as their currencies strengthened. [32]

For emerging markets, a weaker dollar can ease financial conditions by improving borrowers' balance sheets and supporting credit supply. [33] Currency hedging reduces the direct translation effect for investors, but underlying asset prices may still benefit from easier financing.

The effect on US inflation is also partial. In a 2015 study, economist Gita Gopinath reported that over 93% of US imports were invoiced in dollars. [34]

Using 1990–2014 data, Gopinath estimated that about 44% of a dollar depreciation passed through to US import prices excluding petroleum after two years. The effect on consumer prices was much smaller. These historical estimates are not a forecast for the current cycle. [34]

What would turn pressure into a weaker dollar

The case for renewed dollar weakness rests on a narrower expected US interest-rate advantage or reduced demand for US assets. Heavy borrowing and policy concerns matter when they affect that demand.

Attractive yields and demand for dollars during global stress could keep the currency supported despite fiscal pressures.

Frequently asked questions

How do the two dollar indexes differ

Intercontinental Exchange's US Dollar Index (DXY) measures the dollar against six currencies, with the euro carrying the largest weight. [35] The Fed's broad index covers a wider basket weighted by US trade, including the Chinese yuan. [6] The two measures can therefore give different accounts of dollar performance.

Is the dollar losing its reserve currency status

The dollar remained the largest reserve currency in the second quarter of 2026, with a 56.7% share of foreign-exchange reserves. [22] Gradual diversification has not displaced that position.

Wealthion is a dba of Greylock Peak Investments, a registered investment adviser. This newsletter is general information only. It is not investment advice or an offer or solicitation, and it is not tailored to your circumstances. Guests’ views are their own and may not reflect those of Wealthion. Wealthion has not verified guest statements, including any performance figures. Investing involves risk, including loss of principal, and past performance does not guarantee future results. Wealthion refers readers to other registered investment advisers and shares in the fees they receive from referred clients, which creates a conflict of interest. Please see our Form ADV Part 2A and consult your own financial advisor before investing.

Sources

Data through October 21, 2026

Source material and market observations are dated on or before October 21, 2026. Live datasets may update after that date. [1] Federal Reserve issues Federal Open Market Committee (FOMC) statement. Federal Reserve Board, September 16, 2026. Target range and unanimous vote. [2] FOMC target federal funds rate history. Federal Reserve Board, updated September 16, 2026. Target-range changes from 2023 through 2026; dates in the table are effective dates. [3] Treasury and Federal Reserve Foreign Exchange Operations Q1 2026. Federal Reserve Bank of New York. Pages 3 and 5: annual and quarterly currency changes, Brent futures and the energy-exporter mechanism. [4] Treasury and Federal Reserve Foreign Exchange Operations Q2 2025. Federal Reserve Bank of New York. Page 1: tariff announcements, relative growth expectations and currency hedging. [5] Treasury and Federal Reserve Foreign Exchange Operations Q2 2026. Federal Reserve Bank of New York. Pages 1 and 3–4: broad dollar performance, the energy-shock reversal and relative interest-rate expectations. [6] Foreign Exchange Rates H.10. Federal Reserve Board, October 19, 2026 release. Broad index on October 16: 121.4048. [7] Nominal Broad Dollar Index monthly observations. Federal Reserve Board, October 1, 2026 release. January 2025: 128.8369; October 2025: 120.7618. [8] Monetary policy decisions. European Central Bank, September 10, 2026. Deposit rate of 2.50%, effective September 16. [9] Daily Treasury Par Yield Curve Rates. US Treasury. October 21, 2026 row: 10-year yield of 5.13%. [10] The Sensitivity of the US Dollar Exchange Rate to Changes in Monetary Policy Expectations. Federal Reserve Board, September 22, 2017. Research on relative expected policy paths and policy surprises. [11] September 2026 Summary of Economic Projections. Federal Reserve Board, September 16, 2026. Table 1 and Figure 2: median year-end policy-rate projections and their interpretation. [12] The International Role of the US Dollar 2025 Edition. Federal Reserve Board, July 18, 2025. Figures 2 and 10: reserve usage and foreign-currency corporate debt issuance; most recent debt-issuance observations are for 2024. [13] The international role of the euro June 2026. European Central Bank, June 2, 2026. Pages 14–15: gold-inclusive reserve shares and valuation effects; pages 6 and 33–34: dollar behavior during shocks. [14] Monthly Budget Review September 2026. Congressional Budget Office, October 8, 2026. Tables 1–3 and page 3: preliminary fiscal totals, net interest and tariff refunds. [15] The Budget and Economic Outlook 2026 to 2036. Congressional Budget Office, February 11, 2026. Baseline debt-to-GDP projections under stated assumptions. [16] Projections of Deficits and Debt Under Two Scenarios With Higher Interest Rates. Congressional Budget Office, October 8, 2026. Pages 1–3: baseline average yield and scenario with all interest rates 150 basis points higher, holding other economic variables unchanged. [17] Debt to the Penny official dataset. US Treasury. Date-specific debt observations from August 2025 through October 19, 2026. Foreign ownership shares use debt held by the public on August 29, 2025 and August 31, 2026, matched to monthly foreign holdings in source 18. [18] Major Foreign Holders of Treasury Securities. US Treasury International Capital (TIC) data, August 2026. Table 5: August 2025 and August 2026 holdings, foreign official holdings and country-attribution limitations. [19] Frequently Asked Questions Regarding the TIC System and TIC Data. US Treasury. Holdings, transactions, valuation adjustments and the limitations of country attribution. [20] US International Transactions and Investment Position 2nd Quarter 2026. US Bureau of Economic Analysis, September 24, 2026. Current-account balance and financial-account transactions. [21] The Effect of Deficit Reduction Laws on Real Interest Rates. Douglas W. Elmendorf, Federal Reserve Board, July 1997. Historical research on fiscal expectations, real rates and the dollar; cited for the mechanism, not as evidence of the cause of 2026 moves. [22] IMF Data Brief Currency Composition of Official Foreign Exchange Reserves. International Monetary Fund, September 30, 2026. Q2 2026 currency shares, largely unchanged dollar claims and increased euro claims. [23] Currency Composition of Official Foreign Exchange Reserves dataset methodology. International Monetary Fund. Definition excludes monetary gold; allocated and unallocated categories were discontinued with the Q3 2025 release, with historical revisions. [24] Gold Demand Trends Full Year 2025 Central Banks. World Gold Council, January 29, 2026. Central-bank net demand of 863.3 tonnes in 2025 and 1,092.4 tonnes in 2024. [25] Gold Demand Trends Q2 2026 Central Banks. World Gold Council, July 30, 2026. Central-bank net demand of 288.9 tonnes in Q2 2026. [26] Central Bank Gold Reserves Survey 2026. World Gold Council. Conducted February 5 to May 19, 2026; 76 eligible responses overall. Chart 2: 73 responses; 74% expected a lower dollar share of total reserves, including gold, in five years. Methodology. [27] Learning Resources Inc v Trump. US Supreme Court, February 20, 2026. Syllabus and opinion on tariff authority under the International Emergency Economic Powers Act. [28] Kevin Warsh takes oath of office as chairman. Federal Reserve Board, May 22, 2026. Appointment and assumption of office. [29] Trump v Cook. US Supreme Court, June 29, 2026. Interim ruling leaves the injunction preventing removal in place while litigation continues. [30] Consumer Price Index September 2026. US Bureau of Labor Statistics, October 14, 2026. Table A: annual headline inflation of 3.7% and energy inflation of 20.4%. [31] The changing nexus between commodity prices and the dollar causes and implications. Bank for International Settlements, Bulletin 74, April 13, 2023. Commodity-dollar correlations and the US emergence as a net energy exporter. [32] Gold Market Commentary When the dollar turns on itself. World Gold Council, March 5, 2026. February review and Table 1, using data through February 27; cited for historical gold performance, not a current dollar forecast. [33] Financial channel implications of a weaker dollar for emerging market economies. Bank for International Settlements, Bulletin 114, October 13, 2025. Pages 1–3: borrower, investor and credit channels. [34] The International Price System. Gita Gopinath, 2015 Jackson Hole symposium paper, hosted by the Federal Reserve Bank of Kansas City. Printed pages 72–73, 85, 95 and 105–107: invoicing and pass-through. The 44% estimate uses 1990–2014 data, excludes petroleum and measures the response after two years. [35] US Dollar Index Contracts Frequently Asked Questions. Intercontinental Exchange, June 2015. Page 2: six-currency basket and euro weight.