The U.S. dollar entered 2025 as the world's dominant reserve currency, the beneficiary of years of Federal Reserve hawkishness and relative American economic strength. It exits the year as the weakest major currency, having shed 9.1% of its value against a basket of global peers—the steepest annual decline since 2010.

For American investors, the dollar's tumble has profound implications. International investments have received a currency tailwind, commodities priced in dollars have become cheaper for foreign buyers, and the cost of everything imported into the United States has ticked higher. Understanding what drove this decline—and whether it will continue—is essential for positioning portfolios in 2026.

What Happened: The Anatomy of a Currency Decline

The dollar's weakness in 2025 stemmed from a convergence of factors that eroded its yield advantage and safe-haven appeal:

  • Fed rate cuts: The Federal Reserve cut interest rates three times in 2025, bringing the federal funds rate down by 75 basis points. Each cut narrowed the yield premium that had attracted global capital to dollar-denominated assets.
  • European fiscal expansion: Germany's historic €1 trillion spending package, including a €500 billion infrastructure fund, provided fundamental support for the euro. The announcement marked a dramatic shift in German fiscal policy and boosted expectations for European growth.
  • Japanese monetary normalization: The Bank of Japan raised interest rates twice in 2025, beginning its long-awaited exit from ultra-loose monetary policy. The narrowing yield gap between U.S. and Japanese bonds reduced incentives for yen-funded carry trades.
  • Political uncertainty: The 43-day government shutdown, budget battles, and questions about Federal Reserve independence under the new administration all weighed on dollar sentiment.

Winners and Losers From Dollar Weakness

The currency shift created clear winners and losers across asset classes:

International stocks benefited enormously. A U.S. investor holding European equities received not only the local market return but also a currency gain as euros converted back to more dollars. The MSCI EAFE index of developed international markets outperformed the S&P 500 in dollar terms for the first time in years.

Commodities caught a bid. Oil, copper, gold, and other commodities priced in dollars became cheaper for buyers using other currencies. This boosted demand and supported prices even as supply conditions remained adequate.

U.S. exporters gained competitiveness. American companies selling products abroad saw their goods become more attractively priced in foreign markets. This provided a modest tailwind to manufacturing and agricultural exports.

Importers and consumers faced higher costs. The flip side of dollar weakness is that imported goods cost more. From electronics to automobiles to coffee, the weaker dollar translated into higher prices for American consumers—contributing to persistent inflation pressures.

What the Analysts Are Saying for 2026

Currency forecasting is notoriously difficult, but major institutions have staked out positions for the year ahead:

"It's really easy to be a USD bear," noted one currency strategist, though cautioning that much of the bearish case may already be priced in after the 2025 decline.

ABN AMRO forecasts "more dollar weakness ahead," projecting that central bank policy divergence will continue to work against the greenback. ING's G10 FX Outlook suggests investors should be "looking beyond the dollar" for opportunities.

The euro is projected to strengthen toward 1.19-1.21 against the dollar by year-end, according to several forecasts, as German fiscal stimulus gains traction and the European Central Bank maintains relatively tight policy.

The Japanese yen, after snapping a four-year losing streak with a modest 0.3% gain in 2025, is seen as well-positioned for further strength if the Bank of Japan continues raising rates. Analysts project USD/JPY could fall toward 145 if rate differentials continue to narrow.

The Fed Leadership Wildcard

The most significant uncertainty for dollar forecasts in 2026 is Federal Reserve leadership. Chair Jerome Powell's term expires in May, and President Trump is expected to nominate a replacement in the coming weeks.

If the new Fed leadership adopts a more dovish stance—as markets generally expect—the case for dollar weakness strengthens. More rate cuts mean smaller yield premiums, reducing foreign demand for dollar assets.

Conversely, if inflation proves more persistent than expected and the Fed is forced to pause or even reverse its easing, the dollar could stabilize or recover. The currency's path is inextricably linked to monetary policy, which is itself linked to economic conditions and political pressures.

Portfolio Implications for American Investors

The dollar's decline offers several lessons for portfolio construction:

  • International diversification has value: After years of U.S. outperformance, 2025 demonstrated that currency movements can significantly affect relative returns. Maintaining some international exposure provides a hedge against continued dollar weakness.
  • Currency hedging is a choice: Investors can choose to hedge currency exposure in their international holdings. In a rising-dollar environment, hedging protects returns. In a falling-dollar environment, unhedged positions benefit.
  • Commodities offer dollar-decline exposure: For investors who believe dollar weakness will continue, commodity exposure provides a natural beneficiary.
  • Watch real yields: The real interest rate—nominal rates minus inflation—is a key driver of currency values. If real yields in the U.S. continue to fall relative to other developed markets, dollar weakness could persist.

The Bottom Line

The dollar's 9.1% decline in 2025 marked a significant shift in the global currency landscape. Whether this represents the beginning of a multi-year trend or a correction within a longer-term dollar bull market remains to be seen. What's clear is that currency movements matter for portfolio returns, and the assumption of perpetual dollar strength that characterized much of the 2010s no longer holds. Investors entering 2026 should consider their currency exposures carefully—because where the dollar goes next could be as consequential as where stocks and bonds trade.