Capital Ideas^™ 
Investment insights from Capital Group

After a decade-long bull run for the U.S. dollar, a turning point may be near. Historically, long dollar cycles tend to shift when U.S. growth slows, or global economies begin to catch up. Both dynamics now appear to be in play. With shifting fundamentals and policy landscapes, the dollar could face renewed downward pressure over the next 12 months, mainly against the euro.

Structural tailwinds have supported the greenback in recent years, including robust domestic growth, elevated real interest rates and sustained global demand for U.S. assets. However, the landscape is shifting. Trade policies are evolving and central banks are recalibrating their monetary policies. The dollar’s global dominance is intact, though I’m expecting traction in vulnerabilities near-term.

Global growth is converging 

Previously, I’ve argued that prolonged dollar weakness would require the U.S. economy to significantly soften, or other global regions to experience a sharp uptick in growth. Along with my Capital Strategy Research (CSR) colleagues, we now anticipate the growth trajectory of several global economies to converge over the next 12 months. Tariff policy uncertainty along with a weakening labor market are expected to pressure U.S. growth.

At the same time, Europe’s economy is regaining some momentum, with services and consumer spending helping to offset manufacturing headwinds. Germany’s large-scale fiscal stimulus plan, expected to feed its way through the economy over the next year, should help drive growth.

Meanwhile, China’s economy is also showing encouraging signs of stabilization, with stronger equity markets, a rebound in hiring and import growth returning to positive territory. 

The carry trade is fading 

The U.S. has held an advantage regarding real rates, or the cost of borrowing after inflation. This edge has driven capital flows toward the dollar in recent years, supported by favorable interest rate differentials. But with the Federal Reserve now entering a rate-cutting cycle, the carry trade advantage is beginning to fade. For example, traders have been able to borrow in low-rate currencies such as the yen and invest in higher-yielding U.S. assets, taking advantage of higher U.S. rates.

The greenback's strength may erode over the course of 2026, largely because I expect U.S. real rates to converge with other major regions including Europe.

Given the Fed’s policy pivot and CSR anticipating that the European Central Bank will embark on a new rate-hiking cycle in March of 2026, my outlook for the euro is turning more constructive. The value of the euro compared to the U.S. dollar could increase into 2026, potentially toward EUR 1.30 over the next 12 months.

Germany’s stimulus must translate into genuine productivity gains for the euro to sustain momentum beyond 2026. Without that structural improvement, any rally could prove fleeting.

U.S. equity strength can assist the dollar

In the past, global demand for U.S. equities and the large-cap tech companies have buoyed the dollar. The S&P 500 is trading back at record highs after a sharp decline earlier this year due to tariff and policy uncertainties. Continued momentum for U.S. stocks could delay or mute dollar weakness over the next 12 months.

At the same time, investors are showing an appetite for other regions. Non-U.S. stocks are leading global markets through the first nine months of 2025. Part of the boost has come from a 10% decline for the dollar year to date through September 30. Historically, a weak dollar has tended to support returns for international and emerging markets stocks.

A dollar discount, but dominance holds firm 

The idea that the dollar warrants a structural discount—driven by risks to Federal Reserve independence, fiscal vulnerabilities and growing momentum behind de-dollarization—is gaining some traction.

Despite such concerns, there is no immediate threat to the dollar’s dominant status. It remains the primary currency for trade and capital flows, a cornerstone of official reserves and a historically preferred store of value during periods of economic stress.

Although the dollar may undergo a tactical and possibly extended cyclical decline, the scale of the U.S. economy and financial market depth should continue to support the dollar’s global leadership.