Dollar May Face ‘Major’ Drop In 2026, Standard Chartered Says
Investors would be reluctant to increase their exposure to the dollar further if trade policy remains erratic.
The risk of a “major” downturn in the dollar will increase next year if President Donald Trump’s policies add to the US debt burden but fail to boost the economy, according to Standard Chartered.
US government debt and the amount owed to investors outside the country have increased simultaneously in recent years, the bank said in a research note. That puts the dollar and Treasuries at risk from any loss of confidence among foreign investors as they get a better view of the longer-term impact of increased borrowing.
A widening US deficit is reducing national savings while increasing the need for foreign savings, translating into a higher current account deficit, Steve Englander, head of global G10 FX research, wrote in the note. Maintaining a high current account deficit may become challenging in the coming months if Trump’s policies fail to boost growth and foreign investors lose confidence.
“If the economy or financial markets falter, the downside risk to the USD is higher the greater the accumulation of external liabilities,” Englander said.
Foreign creditors will likely become more concerned about debt sustainability if tariffs and tax policies fail to boost growth, and “would very likely show up as risk premia, either in the form of higher rates or a weaker USD,” he added.
The dollar and Treasuries have already taken a hit from Trump’s aggressive tariffs and their chaotic rollout, with some investors questioning the stability of US assets. While Trump has shown a willingness to negotiate on trade policies, investors are turning their focus to fiscal issues and the amount of new debt that would result from his multi-trillion dollar tax bill.
For the moment, foreign investors are hesitant to dump the traditional safe-haven assets altogether while they wait to see if Trump’s policies lift growth, the bank said. The tax bill may help the economy this year if approved, but the boost is likely to fade by mid-2026 or 2027, Englander said, giving way to concerns about the long-term impact on growth and debt.
Investors would be reluctant to increase their exposure to the dollar further if trade policy remains “erratic,” he said, potentially generating a “pronounced” move in the dollar. Improved economic growth prospects in China and Europe would add further selling pressure, he said.
The effectiveness of any policy easing by the Federal Reserve may be limited, Englander said, as the resulting lower rates on shorter-dated Treasuries may not extend to longer maturities if investors see the typical increase in the fiscal deficit during recessions as adding to an unsustainable debt path.
Englander said the US may never be at risk of insolvency so long as the government can continue to issue dollar-denominated debt, but he added that “effective default through inflation risk could become a material risk.”
“If the debt path is not flattened, borrowing terms may become increasingly onerous as risk premia increase the cost of public and private borrowing,” he added.
