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After one of its weakest performances in nearly a decade, the U.S. dollar is closing out the year with tentative signs of stability. Still, many investors believe the currency’s struggles are far from over, with expectations growing that renewed global growth and looser U.S. monetary policy could push the dollar lower in 2026.

The dollar has fallen more than 9% this year against a basket of major currencies, marking its worst annual decline in eight years. The slide has been fueled by a combination of anticipated Federal Reserve rate cuts, narrowing interest rate advantages over other economies, and persistent concerns about U.S. fiscal deficits and political uncertainty.

Although the dollar index has recovered roughly 2% from its September lows, most currency strategists see the rebound as temporary rather than the start of a lasting turnaround.

Overvaluation Concerns Persist

Despite this year’s pullback, many analysts argue the dollar remains expensive by historical standards. Measures tracking the currency’s inflation-adjusted value against global peers show it is still hovering near long-term highs, underscoring how limited the correction has been relative to the dollar’s multi-year surge.

From an investment perspective, the dollar’s path matters well beyond foreign exchange markets. A weaker dollar can lift earnings for U.S. multinational companies by increasing the value of overseas revenues, while also making international assets more attractive to global investors.

Still, several market participants warn that valuation alone may not be enough to drive a sharp or immediate decline.

Global Growth Shifts Could Weigh on the Dollar

A key factor shaping expectations for 2026 is the outlook for global growth. Investors increasingly believe the United States’ growth advantage will narrow as other major economies regain momentum.

Fiscal stimulus in Germany, ongoing policy support in China, and improving conditions across the euro zone are all seen as reducing the relative appeal of U.S. assets. As growth differentials shrink, capital flows that previously favored the dollar could begin to shift elsewhere.

Some investors caution, however, that a meaningful slowdown in the U.S. economy could complicate the picture. While weaker growth might pressure the dollar, it could also trigger broader market volatility that temporarily boosts demand for safe-haven assets.

Central Bank Policy in Focus

Monetary policy divergence remains another major driver. The Federal Reserve cut interest rates in December, and policymakers have signaled openness to additional easing next year. Lower U.S. rates tend to reduce demand for dollar-denominated assets, placing downward pressure on the currency.

Markets are also factoring in leadership changes at the Fed, with expectations that a new chair could lean more dovish. Several potential candidates have previously expressed support for lower interest rates, reinforcing investor expectations of a softer policy stance.

Meanwhile, other major central banks, including the European Central Bank, are widely expected to keep rates steady, with some analysts not ruling out tightening if inflation proves persistent.