In my preview for markets in 2026, I forecast that the Dollar would resume its fall this year after it went into a holding pattern in the second half of 2025. My rationale was that the Dollar versus emerging markets (EM) has proven itself to be the most reliable leading indicator of Dollar direction. This measure has been falling ever since the Fed cut rates on December 10, a sign Dollar weakness is about to assert itself again. This post provides a quick update on Dollar price action.
The chart above shows two lines. The black line is the trade-weighted Dollar against other advanced economies (the G10). The blue line is the Dollar versus EM. The latter is a much better measure of Dollar strength or weakness - as I noted in my last post of 2025 - and has been pointing to a resumption of Dollar weakness.
The Dollar versus the G10 is incredibly noisy and - although it’s fallen in recent days - it hasn’t yet moved below the range it’s bounced around in since the middle of 2025. But the Dollar versus EM keeps making new lows. This is the signal to watch. Dollar debasement has begun.
So, all developed currencies are also falling vs EM. Can we say major DM currencies are racing toward debasement? Yen is a probable. (SEK may be an outlier)???
The debasement trade is reinforced by a current account deficit that ran near 3.5% of GDP through 2025. Foreign holders of U.S. Treasuries have less incentive to roll over positions when the dollar is depreciating and real yields are uncertain. The key variable is whether reserve managers at central banks change their behavior at Treasury auctions. How are you tracking foreign official demand as a leading indicator for the next leg of dollar weakness?