Why the Dollar May Have Much Further to Fall

Why It Matters

A declining dollar raises import costs, fuels inflation, and reshapes global capital flows, affecting investors and corporations worldwide.

Key Takeaways

• US fiscal deficits widening, pressuring dollar value
• Fed rate cuts expected, reducing yield advantage
• Eurozone and UK rates rising, narrowing spread
• Global investors shifting to non‑dollar assets
• Higher dollar volatility threatens emerging‑market debt

Pulse Analysis

The dollar’s vulnerability stems from a confluence of domestic fiscal imbalances and shifting monetary policy. The United States has been running sizable budget deficits for consecutive years, pushing national debt to historic highs. As Treasury yields climb to fund this debt, the fiscal outlook becomes a drag on confidence, prompting foreign investors to question the dollar’s long‑term stability. This fiscal backdrop is compounded by a Federal Reserve that appears poised to pause or even reverse rate hikes, narrowing the interest‑rate differential that traditionally underpins the greenback's strength.

Internationally, several major economies are moving in the opposite direction. The European Central Bank and the Bank of England have both signaled aggressive tightening cycles, raising policy rates faster than the Fed. These moves tighten the yield spread in favor of the euro and pound, making them more attractive to yield‑seeking capital. Moreover, geopolitical tensions and supply‑chain disruptions have nudged investors toward diversified safe‑haven assets such as gold and the Swiss franc, further diluting the dollar’s safe‑haven appeal.

The broader market implications are profound. A weaker dollar inflates the cost of imported goods, feeding domestic inflation and potentially prompting the Fed to reconsider its stance. For multinational corporations, currency volatility complicates earnings forecasts and hedging strategies. Emerging‑market economies, many of which carry dollar‑denominated debt, could face higher repayment burdens, increasing the risk of sovereign defaults. Stakeholders across the financial spectrum should monitor fiscal policy developments and global rate trajectories to gauge the dollar’s trajectory over the coming months.

Why the dollar may have much further to fall

It is hard to be a safe haven when trouble starts at home · Illustration: Pete Ryan · Feb 5 2026 · NEW YORK · 8 min read

“CONFIDENCE, ESPECIALLY international confidence, is a fragile flower,” warned William Treiber, a long‑serving Federal Reserve official, to colleagues on the central bank’s rate‑setting committee in 1961. “We must be constantly alert to conduct our monetary and fiscal affairs so that we provide no basis for those abroad to raise questions regarding the ultimate soundness of the dollar.”