The US dollar has seen a significant retreat this year, with the Dollar Index falling 8.5% year-to-date. Institutions like Morgan Stanley are now forecasting a further 9% drop before the end of 2026. While this may seem steep, the underlying dynamics point to a broader structural shift in the currency landscape—one that investors can no longer afford to ignore.
At the heart of the story lies changing sentiment around US monetary policy. As inflation continues to moderate and economic data begins to soften, the market is increasingly leaning towards the idea that the Federal Reserve could pivot to rate cuts in the coming quarters. A weaker dollar outlook is quickly becoming consensus, rather than a contrarian view.
But it isn’t just the Fed driving this narrative. The dollar is also under pressure from renewed trade tensions. Since the start of 2025, Washington’s tariff-first approach has reignited friction with key trade partners. Not only does this complicate global supply chains, but it also reduces international demand for the dollar as the default trade settlement currency. On a broader level, central banks across the world are slowly reducing their exposure to USD reserves, reallocating towards gold and alternative assets. And all of this is happening while the US federal debt inches towards a staggering USD 36 trillion—a level that naturally raises questions about long-term fiscal discipline.
Over the last decade, dollar strength was underpinned by US assets outperforming their peers in Europe and Asia. The S&P 500 soared, and capital poured into American equities, bonds, and tech-driven innovation. But with valuations now sitting at multi-decade highs and investor appetite turning cautious, that strength is losing steam. The USD no longer has the same gravitational pull it once did.
What adds another layer of complexity is the potential revival of a policy-driven dollar devaluation. The Trump administration is reportedly exploring a proposal dubbed the “Mar-a-Lago Accord”—a deliberate effort to adjust global trade and currency imbalances through negotiated depreciation of the US dollar. The rationale is clear: a weaker dollar would make American exports more competitive, narrow the trade deficit, and help fuel the domestic manufacturing revival that has become a political priority.
This wouldn’t be the first time such a playbook is used. Back in 1985, the Plaza Accord achieved something similar, with coordinated currency intervention leading to a 50% drop in the dollar’s value against the yen within just three years. While the strategy did deliver trade relief, the long-term effects were less benign—most notably for Japan, which entered what later became known as its “Lost Decades.”
If the Mar-a-Lago Accord were to take shape, the implications for the dollar’s long-term value could be profound. Beyond exchange rates, parts of the plan reportedly involve transforming a portion of US debt into perpetual bonds—an idea that, if enacted, would challenge the notion of US Treasuries as a ‘risk-free’ benchmark. Such a move could trigger a major repricing of sovereign risk and fundamentally shift global capital flows.
The impact of a weakening dollar is already being felt across other major currencies. The Swiss franc and euro have posted double-digit gains year-to-date, with the Japanese yen, British pound and Australian dollar also benefitting from the shift in sentiment. For international investors, particularly those holding assets in HKD or AUD, the path forward calls for careful navigation.
With global trade dynamics evolving and capital markets reacting to new geopolitical realities, portfolio diversification is becoming not just a strategy—but a necessity. As the world rebalances around a less dominant dollar, investors should be thinking globally, reallocating intelligently, and preparing for a more multipolar financial system.
