Dollar 2026 decline: more cyclical than structural in Daily Currencies Ratings 25/02/2026 Is the dollar genuinely ‘weak’ in historical terms? Not by long-term standards. For all the talk of the dollar being weak, it is still very strong by historical standards. One of the best ways to appreciate the overall level of the dollar is to look at a trade-weighted currency measure which is adjusted for relative consumer price levels – or what is called a ‘real’ rather than a nominal exchange rate. Looking at the Fed’s measure of the dollar against 26 trading partners, last year’s sell-off has barely scratched the 45% rally since 2011. No wonder investors last year bought into the concept of a Mar-a-Lago accord to weaken the dollar, as Washington sought to level the global playing field for US manufacturers. In short, the dollar is not particularly weak and could fall a lot further should it be warranted. Are investors changing their $ hedge ratios? Yes, but only gradually. FX hedging, or the management of currency risk by portfolio managers, is a very important FX flow. The severity of the dollar’s sell-off last April, and the subsequent resilience of US asset markets, has lent much focus to the role of buy-side currency hedging. At the time, this was examined in a BIS study, where it looked like Asian investors had had a big say – even though Fed Chair Powell seems to disagree with the report’s conclusions. We agreed with the report’s findings that high dollar hedging costs had kept investor dollar hedge ratios low, although it was notable – looking at EUR/USD hedging levels anyway – that investors were relatively underhedged early last year. The consensus view at the time was that the dollar would stay strong as tariffs took their toll on the currencies of US trading partners. That view was wide of the mark. The latest data provided by the Danish central bank on the currency practices of local pension funds and asset managers – one of the very few data sets on buy-side FX hedge ratios – shows a 72% hedge ratio for the end of last year. January 2026 data will be released in early March. Our baseline assumes that the cyclical factor of a 50bp Fed cut versus unchanged ECB rates will see dollar hedging costs narrow further and should be consistent with dollar hedge ratios being raised to around 74% by the end of the year. In other words, more dollar selling will be coming through. A shift to an over-hedged position of 80/82% is not in our baseline and would probably require a much greater loss of confidence in the dollar. Is the dollar’s reputation as a safe haven damaged? Yes, the dollar has lost a big chunk of its safe haven value compared to 2024. In the chart, we identify a measure of the dollar’s safe haven value by calculating the difference between the Bloomberg dollar index three-month correlation with US stocks and US 10Y sovereign yields. The more negative the index, the more the dollar acts as a safe haven, as it responds positively to stock selloffs and higher long-dated Treasury yields. There are two key points here: 1. The dollar has lost some, but not all, of its safe-haven value. If we isolate the three-month correlation with the S&P500 only, that is -0.25: less negative than historical standards, but still statistically significant. 2. Correlations tend to be cyclical. The chart shows many instances of the dollar losing its appeal as a defensive currency. We need to be careful to conclude that this time the shift is structural,