Monthly Outlook: February 2026
Most markets are off to a good start in 2026, with global stocks, bonds, commodities, REITs, and other markets posting solid gains in January. One market, however, is clearly losing ground and that is the US dollar. And isn’t that the market we’re really most concerned about? Isn’t that our “bottom line?”
The US Dollar Index measures the value of the US dollar against a trade-weighted basket of foreign currencies including the euro, yen, Canadian dollar, and Aussie dollar. This index shows that the US dollar has lost 11.7% in the last year (since its peak in January 2025) and lost 1.2% last month, alone (January 2026). Currencies fluctuate against each other all the time, but when our currency falls nearly 12% in a year and the trend continues to be lower, we have to ask, where does it stop?
Why Do We Care About US Dollar Devaluation?
As Americans, we’re so used to pricing everything in dollars that we don’t stop to think about the stability of the denominator in our price quote. An apple might be $2, with the apple as the numerator and the dollar as the denominator. It’s the apple that fluctuates in price, right? Not the dollar? That’s not true, mathematically. The apple doesn’t change; the dollar does. The price of the apple didn’t go up by 15%, the value of the dollar went down by 15%. We’re all focused on price inflation, but really, we should be equally focused on currency devaluation. With the recent, and ongoing, decline in the US dollar value, we need to pay more attention. If the dollar continues to fall, everything is going to be more expensive, so we care!
Trade Deficits and Dollar Devaluation
What makes a currency go up or down against other currencies? It’s complicated, but it’s many factors. Interest rates, inflation, GDP growth, and especially global trade imbalances are the primary inputs. The U.S. has been a net importer for years. That is, we buy more “stuff” from other countries than we sell to them. When the trade deficit rises to about 3% or more of GDP, it signals an imbalance and sometimes leads to government intervention. In the early 1980s, inflation and then interest rates were sky-high, which drove the value of the US dollar Index to a record high of 160. This hurt US exporters and the economy, in general. Global leaders met in New York City in 1985 and hashed out “The Plaza Accord” to systematically devalue the US dollar (and increase the German mark and Japanese yen). It worked and the US Dollar Index fell to 85 by 1987.
Today, the trade deficit is higher than it was in 1985, at about 4% of GDP, and this has the attention of Trump and the US Treasury. And the US dollar has been very strong for the past 15 years (after the 2008 Great Financial Crisis), rising from 75 to a peak of 110 last year. This has helped US stocks. But the strong dollar hurts US exporters, remember. Trump could call for a summit of global leaders like Reagan did in 1985. Instead, he’s gone the solo route of imposing big tariffs on most other countries, with the hope of reducing our trade deficit and lowering the value of the US dollar. Maybe he had a summit with himself; we’ll call it the “Mar-a-Lago Accord.” In an interview just last week, Trump was asked about concern over the falling dollar and he said, “I think it’s great. Look at the business we’re doing. The dollar is doing great.” The point is not to be political, but to show evidence that the US dollar decline is intentional and is likely to continue.
Falling US Dollar Implications for Investing
We have many cycles of currency fluctuations to study, and we can see patterns of how various asset classes perform in each cycle. Generally speaking, when the US dollar is trending lower (as it is now), we can expect general price inflation for goods and services, international stocks and bonds to outperform US markets, rising commodity prices, and more expensive foreign travel for Americans. When the dollar is declining, it’s like walking the wrong way on those airport people movers.
If the US dollar continues to trend lower, which we expect, it likely makes sense to continue overweighting international and emerging market stocks over US stocks. Today, the neutral weighting would be 65% US / 35% INTL stocks, and we recommend at least that much INTL weighting. Also, it makes sense to add some “real assets” to portfolios as a currency hedge, which includes global REITs, commodities, and infrastructure, for example. Lastly, it might be the year to take a domestic vacation!