Why the Dollar’s Steepest Declines May Already Be Over

A Tough Year for the Dollar, but the Steepest Damage Is Done

The U.S. dollar is enduring one of its most difficult stretches in years, with the Dollar Index registering a mid‑single‑digit drop this week alone and a decline of around 8–10% year‑to‑date, putting it on course for its worst calendar performance in decades. The move caps a brutal first half that saw the index fall more than 10%, its weakest opening six months since the early 1970s, as investors reassessed U.S. growth, policy credibility, and fiscal sustainability.​

Yet there are growing signs that the sharpest phase of the selloff is behind us, even if the dollar’s medium‑term trajectory remains gently lower. The velocity of the decline has eased, positioning is cleaner, and relative valuation versus recent history now looks less stretched, even though structural headwinds persist.​

Fed Rate Cuts, Data Gaps, and Market Expectations

In the near term, dollar direction is still dominated by Federal Reserve expectations. Futures markets now assign roughly an 80–85% probability to a 25‑basis‑point rate cut at the December meeting, a sharp jump from around 40–50% only a week earlier. That repricing has reinforced the dollar’s latest leg lower and propelled gold toward fresh highs as investors discount a more accommodative policy stance.​

Complicating matters, a protracted government shutdown has created a vacuum in official U.S. macro data, delaying publication of key indicators on growth, inflation, and employment. However, the Fed is not flying blind: regional Beige Book anecdotes indicate broadly flat activity with modest softening in labor conditions, while weekly claims and high‑frequency labor data still point to a cooling but resilient jobs market. Corporate layoff announcements from large employers add to the sense that policy can safely shift toward easing without immediately reigniting inflation.​

The Hassett Factor: A Potentially More Dovish Fed

The political overlay now matters almost as much as the macro data. Predictive betting markets and financial media reports indicate that economist Kevin Hassett has emerged as the frontrunner to succeed Jerome Powell as Fed chair, with platforms like Polymarket assigning him odds north of 50%, ahead of other candidates such as Christopher Waller.​

Hassett is widely viewed as dovish relative to the current committee consensus and closely aligned with President Donald Trump’s longstanding preference for lower rates. Investors expect that a Hassett‑led Fed would lean toward a more aggressive rate‑cut cycle over time, reinforcing a weaker‑dollar bias, steepening the Treasury yield curve, and potentially loosening U.S. financial conditions more quickly than under a more hawkish successor.​

Structural Diversification Away from the Dollar Won’t Reverse Overnight

Beyond cyclical policy dynamics, the dollar is wrestling with multi‑year structural headwinds. Persistent fiscal deficits, a wide current‑account gap, and concerns about institutional credibility have encouraged central banks and large asset owners to diversify reserves modestly into other currencies and gold. Data over recent years show a gradual erosion of the dollar’s share in global FX reserves, even as it remains dominant in trade invoicing and funding.​

At the same time, other major central banks are no longer passive followers. The Bank of Japan has shifted away from ultra‑loose policy, while various smaller central banks, from New Zealand to parts of Europe, have signaled either a pause or a mild hawkish tilt relative to the Fed. These cross‑currents are recalibrating yield differentials and encouraging market participants to reassess long‑standing long‑USD positions, even if the initial reallocation wave has already washed through.​

Why the CEO Sees Most of the Dollar Damage as Past

Against this backdrop, the CEO’s view that the bulk of the dollar’s decline is already behind us reflects three core arguments. First, much of the Fed‑cut story is now in the price: with markets already assigning a high probability to near‑term easing and several cuts further out, marginal surprises may be smaller and less one‑sided. Second, sentiment and positioning have turned sharply against the dollar after one of its worst first halves on record, leaving less scope for disorderly capitulation.​

Third, relative valuations versus other major currencies are no longer as extreme, especially against the euro and selected commodity currencies, where local risks and policy ambiguity remain. That does not rule out further weakness—it simply argues that the phase of rapid, trend‑like depreciation is likely to give way to a more grinding, two‑way market in which idiosyncratic stories drive FX returns.​

Tactical FX Views: Where Residual Downside Remains

Even if the heaviest selling pressure is behind us, the case for a somewhat weaker dollar over the next 6–18 months remains intact. Relative growth momentum still favors parts of Europe and commodity‑linked economies, while a more dovish Fed relative to peers should slowly erode the greenback’s interest‑rate advantage.​

In this environment, an “unattractive” view on the dollar can coexist with constructive stances on select alternatives. The euro, Australian dollar, and Norwegian krone stand out as beneficiaries of improving local narratives and shifting rate differentials. In emerging markets, higher‑yielding currencies with credible policy frameworks and manageable external balances can offer appealing carry and diversification versus low‑yielding, more defensive peers.​

Gold as a Core Conviction in a Late‑Cycle World

Gold has been a clear winner of the current regime. Spot prices have traded close to 4,200 dollars per ounce, having surged on the back of rising expectations for U.S. rate cuts, dollar weakness, and persistent geopolitical and fiscal uncertainty. Futures markets and technical analyses suggest that a sustained break above resistance near the 4,190–4,245 range could open the path toward new highs and potentially even higher levels over the medium term.​

From a strategic standpoint, gold remains “attractive” as an uncorrelated hedge against policy error, sovereign risk, and equity‑market drawdowns. A credible mid‑2026 target in the mid‑4,000s per ounce is consistent with a scenario of moderate further dollar weakness, lower real yields, and ongoing demand from central banks and long‑horizon allocators.​

Dollar Weakness as a Tailwind for U.S. Equities

A softer dollar is not universally negative for U.S. investors; it often functions as an earnings tailwind. When the currency cheapens, overseas revenues translate into higher nominal profits for U.S. multinationals, supporting earnings per share and, by extension, equity indices such as the S&P 500. Historically, prolonged dollar downtrends have coincided with periods of stronger relative performance for international‑facing sectors, including technology, industrials, and consumer brands with significant ex‑U.S. exposure.​

On current forecasts, a reasonable base case is for S&P 500 earnings per share to grow at a high‑single‑ to low‑double‑digit pace over the next two years, supported by nominal GDP growth, margin stabilization, and FX translation effects. That combination makes a medium‑term index level in the high‑7,000s plausible if valuations remain contained and earnings deliver.​

Portfolio Construction: Strengthen the Core, Then Add Satellites

For CEOs, CIOs, and family offices, the primary implication is not to make binary calls on the dollar, but to ensure robust diversification across currencies, geographies, asset classes, and sectors. A resilient “core” can be built around quality global equities, investment‑grade credit, and strategic exposures to real assets and gold, with currency risk managed rather than ignored.​

Around that core, investors can add “satellite” positions in higher‑beta themes—select emerging‑market FX, cyclical sectors, or alternative strategies—that benefit from a softer dollar and lower real yields but do not jeopardize long‑term objectives if the macro path surprises. Discipline on liquidity, leverage, and risk budgeting matters more than ever in an environment where politics and policy can shift quickly.

Dollar, Fed expectations, gold, and positioning