Highlights:
- The US dollar index is down 2.2 per cent in 2026 after falling more than 9 per cent in 2025
- Economists call the weaker dollar a “double-edged sword” for the US economy
- Market watchers say the dollar has entered a long-term bear market
- Investor confidence, inflation, and deficits are key concerns
- Global capital may rotate away from US assets, pressuring the dollar further
The US dollar could face further declines after entering what analysts describe as a bear market, with economists warning that its weakness presents a “double-edged sword” for the American economy.
The greenback fell sharply on Tuesday (27), marking its worst single-day decline since April, when president Donald Trump’s so-called “liberation day” announcements sparked what markets dubbed the “sell America” trade. The slide came shortly after Trump said the dollar was “doing great,” comments that failed to reassure investors.
The US dollar index, which tracks the currency against a basket of major peers, is down 2.2 per cent so far this year, following a drop of more than 9 per cent in 2025. Market participants say the move reflects deeper concerns about the US economic outlook rather than short-term volatility.
Trump has long argued that a weaker dollar benefits the US by improving trade competitiveness. “It doesn’t sound good, but you make a hell of a lot more money with a weaker dollar... than you do with a strong dollar,” he said last July. He added that while an extremely weak dollar is undesirable, a moderately weaker one helps exporters, tourism, and domestic producers who struggle under a strong currency.
A softer dollar can indeed support the economy by making US exports cheaper abroad and increasing the value of overseas earnings when converted back into dollars. However, economists warn that these benefits come with significant downsides.
Speaking to CNBC, ADP chief economist Nela Richardson described the currency’s decline as a “double-edged sword.”
“[It] does make US exports more competitive abroad, but a weak dollar at home doesn’t always have the confidence of markets,” Richardson said. “And that confidence is going to be very important as we look at other things that are a struggle for the US economy, like sticky inflation, like high deficits and debts, and the need to sell treasuries, both domestically and abroad.”
Richardson argued that the weakening dollar signals growing complexity beneath strong headline economic data. While unemployment and growth figures appear solid, she said currency markets are reflecting underlying stress.
“The headline numbers don’t tell the whole story, and that dollar weakness is a sign of the fraying of that story even though the headline numbers objectively are strong,” she said.
She added, “If you knew nothing about the last year, but just saw the headline numbers … you would capture a very strong US economy that would suggest a stronger dollar and an interest rate policy that was not going lower, but that is not where we find ourselves today.”
Richardson also pointed to falling consumer confidence, which recently hit its lowest level in more than a decade, as evidence of a “K-shaped” economy.
“It’s a K-shaped consumer spending pattern where the top 20 per cent of income earners are driving most of the spending in the United States, and the lower quartile of consumers are struggling over the higher pace of inflation,” she said. “The numbers look good, but underneath the surface is where all the action is.”
That divide is also visible in the labor market, she noted, with job growth concentrated in health care and leisure sectors. “If you are well heeled, this economy is great for you. If you are not, it’s a struggle,” Richardson said.
Other market watchers believe the dollar’s decline has only begun. Cole Smead, CEO of Smead Capital Management, said the US is entering a prolonged downturn for the currency.
“We’re in a dollar bear market longer term,” Smead said, citing past cycles following major US market booms. He noted that after the tech bubble burst, the dollar fell about 41 per cent from its 2002 peak to its 2008 low.
Smead pointed to massive capital inflows into US assets over the past decade, fueled recently by the artificial intelligence boom. With US stocks now accounting for roughly 70 per cent of the MSCI World Index, he said future capital rotation could weigh heavily on the dollar.
“As money will flow eventually [to] other places, as [investors] seek out better returns, we’re going to see the dollar struggle because of that capital account movement abroad,” he said.
Analysts at TS Lombard echoed that view, saying the “sell America” trade has resurfaced. Despite strong US growth forecasts, they warned that the dollar remains richly valued and vulnerable to further declines as global growth expectations outside the US begin to catch up.
