The US dollar is expected to decline somewhat dramatically by 2025. The Bloomberg US Dollar Index has fallen nearly 9% throughout the year, marking the worst performance since 2017. It has been sliding from a high of 110 at the beginning of the year, dropping 10.8% in the first half alone, and hitting the worst level since 1973 for the same period. The problem is, the options market is still flashing warning signs—suggesting that the dollar may face an even harsher round of decline in 2026.

The fundamental reason is quite clear: divergence in central bank policies. The Federal Reserve has cut interest rates three times in 2025, and the federal funds rate is now at 3.50%-3.75%. Market expectations are for another 25 basis point cut in 2026. In contrast, the European Central Bank remains on hold, and the Bank of Japan continues cautious rate hikes. This has led to a narrowing of US dollar interest rate spreads, reducing its attractiveness. Coupled with high US fiscal deficits and downgraded sovereign credit ratings, global central banks are beginning to offload dollar reserves, which have fallen to a 30-year low. The foundation of dollar dominance is weakening.

The options market’s short sentiment has reached extreme levels. The one-year risk reversal indicator has fallen to -27 basis points, the most pessimistic level recorded since 2011. Speculators have been collectively shorting the dollar since October, with the euro and Australian dollar serving as hedging tools. From the premium in derivatives markets, everyone is paying premiums for a further decline in the dollar—indicating that the market is genuinely worried.

Looking ahead to 2026, almost all institutions are bearish. More than six major investment banks forecast the dollar index will fall another 3% by year-end. Deutsche Bank even explicitly stated that the long-term bull market for the dollar is essentially over. While institutions like Citigroup remain optimistic about the resilience of the US economy, the dollar’s current valuation is still at a historical high, and economic recovery in other regions will continue to erode the US’s growth advantage. Additionally, central banks around the world are record-breaking in gold purchases, further diverting demand away from dollar assets.

From foreign exchange trading to global asset allocation, the chain reaction of the dollar’s decline has already begun. The wave of decline in 2026, driven by policy divergence, valuation bubbles, and the weakening of its reserve currency status, could reshape the global financial landscape.