Outlook 2026: Weakening U.S. dollar

Positives for Emerging Market debt and commodity prices

We’ve been presenting our 2026 economic and market outlook starting with three cyclical themes that we believe are important to understand. We looked first at the theme of broadening, that is, our conviction that investment opportunities across regions and asset classes are expanding. And last time, we examined the second of our cyclical themes – steepening of the yield curve, which we believe reinforces our previous broadening thesis, as investors will be incentivized to seek new opportunities in duration, credit, equities and elsewhere. In this post, we’ll drill down into the third of our major cyclical themes – the weakening of the U.S. dollar.

Year-to-date, the trade-weighted value of the U.S. dollar has fallen by about 10%. Various factors suggest its decline is not yet over. Among them are probable further Fed rate cuts owing to a softening US labor market. Shifting global portfolio flows, reflecting more attractive equity and fixed-income opportunities outside the United States, should also contribute to dollar weakness.

Dollar weakness has important implications for investors. Emerging Market (EM) debt denominated in local currency is a potential winner, reinforced by the likelihood that EM currency appreciation will push domestic inflation down, allowing emerging central banks to ease. Lower interest rates, of course, also boost EM equity valuations.

Similarly, a weaker dollar could nudge Eurozone inflation below target, prompting further rate cuts from the ECB. Lower Eurozone rates, in turn, would provide additional support for European equity and credit markets.

For euro, sterling, yen, and other non-U.S.-dollar investors, falling U.S. interest rates reduce the costs of currency hedging. That means that a greater fraction of the returns in EM debt can also accrue to investors in Europe, Japan, and elsewhere.

A softer dollar also tends to push up the dollar price of many commodities, including gold and other precious metals. Accordingly, dollar weakness offers opportunities in various commodity markets, either directly (via futures) or indirectly (via the shares of commodity producers). Floating digital currencies may also appreciate against a softer U.S. dollar.

Crude oil, however, may be an exception in the commodity universe. Recent U.S. sanctions against Russian energy notwithstanding, weak oil prices in 2025 reflect ample supply. And should a resolution to the Russia-Ukraine war arrive, anticipation of a resumption of Russian oil supplies could push crude oil prices even lower.

In short, weakening of the U.S. dollar tends to reinforce a broadening of returns across capital markets, by region, sector, and asset class.

Next time: The three major themes for our long-term outlook: The Age of Intelligence; Private assets becoming mainstream; and an era of big government.

Stephen Dover, CFA, is Franklin Templeton’s Chief Market Strategist and Head of the Franklin Templeton Investment Institute. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.

Lawrence Hatheway is Global Investment Strategist – Franklin Templeton Institute.

Excerpted from Global Investment Outlook: 2026 and Beyond, Franklin Templeton Institute, originally published on the Franklin Templeton website, Nov. 17, 2025.

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