Chart of the Week: Is the US Dollar in structural decline?
The latest from our global analysts.
This edition’s insights come from Morningstar’s 2026 Global Outlook Report.
The US dollar has its weakest year in almost a decade
The US dollar weakened sharply in 2025, driven by fiscal concerns and reduced confidence in policy.
The selloff reflected a mix of persistent structural pressures and new vulnerabilities that intensified in 2025. Long-standing concerns included rising US debt burdens - exacerbated by the “Big Beautiful Bill” - and the gradual erosion of the US growth premium, particularly as tariff uncertainty clouded the economic outlook.
Meanwhile, new threats emerged. Global investors began increasing hedging of their US exposures, reversing years of reduced hedging when confidence in “US exceptionalism” was stronger. Policy uncertainty - ranging from questions about Federal Reserve independence to market sensitivity around tariff headlines - further weighed on sentiment.
Together, these factors drove one of the most notable episodes of dollar weakness in recent memory.
Is the US Dollar in structural decline?
While the dollar’s recent decline has been pronounced, the evidence doesn’t point to a full-blown structural collapse.
Much of the weakness reflects cyclical and policy-driven forces-slowing US growth, narrowing rate differentials, persistent fiscal deficits, and elevated inflation. External factors such as shifting global capital flows, renewed hedging of dollar assets, and waning confidence in US macroeconomic policy have also added pressure.
That said, important structural supports remain intact. The dollar continues to serve as the world’s dominant reserve and settlement currency, and it retains its safehaven appeal during periods of market stress.
In our view, the greenback is likely entering a more prolonged phase of cyclical weakness - not a secular decline
Is the dollar attractive again?
The simple answer: not quite. Although the sharp decline has grabbed headlines, a broader historical perspective reveals that the dollar remains elevated. Following a multiyear rally, the recent depreciation has improved valuation relative to the start of the year, but the dollar still trades at a premium versus most peers.
Among the 34 major developed- and emerging-market currencies we track, only nine are currently more overvalued than the US dollar-suggesting that, while cheaper, the greenback is far from “cheap.”
How should investors position their portfolios?
For investors outside the US, exposure to US dollars may be large in portfolios with bigger equity allocations, given the global dominance of US stocks.
Here, managing dollar exposure requires balancing hedging costs and diversification benefits. Hedging converts volatile exchange-rate movements into steadier returns driven by short-term interest rate differentials with the US. These “foreign currency hedge returns/costs” vary widely as seen below.
