The US dollar has recorded its worst performance in eight years! The options market warns of a more severe decline in 2026.
In 2025, the US dollar experienced a 'Waterloo' style crash, with the Bloomberg Dollar Spot Index plunging nearly 9% throughout the year, marking the worst annual performance since 2017. It fell sharply from a high of 110 at the beginning of the year, with a staggering decline of 10.8% in the first half of the year, setting a record for the same period since 1973. The dangerous signals released by the options market indicate that the dollar may face even more intense downward pressure in 2026.
Behind the dollar's slump, the Federal Reserve's loose policy is the core driver. In 2025, the Federal Reserve cut interest rates three times, bringing the federal funds rate down to 3.50%-3.75%. The dot plot indicates a possible further reduction of 25 basis points in 2026, while the European Central Bank maintains rates unchanged and the Bank of Japan cautiously raises rates. The divergence in monetary policies among the US, Europe, and Japan continues to narrow interest rate spreads, diminishing the attractiveness of dollar-denominated assets. Coupled with a high US fiscal deficit and a downgrade in sovereign credit ratings, global central banks are accelerating their reduction of dollar reserves, which have fallen to a new low in 30 years, further undermining the foundation of dollar hegemony.
The bearish sentiment in the options market has reached extremes. The one-year risk reversal indicator for the dollar has dropped to negative 27 basis points, the most pessimistic level since records began in 2011. Speculative traders have collectively shorted the dollar for the first time since October, with the euro and the Australian dollar becoming the main tools for hedging against dollar depreciation. Data from custodial trusts and clearing companies show that the premiums paid by the market to hedge against a decline in the dollar continue to rise, reflecting strong concerns about the subsequent downward trend.
Looking ahead to 2026, institutions widely warn that the decline is not over. More than six major investment banks predict that the dollar index may fall another 3% by the end of the year, with Deutsche Bank bluntly stating that 'the long-term bull market for the dollar is nearing its end.' Although institutions like Citigroup are optimistic about the resilience of the US economy, the dollar's valuation remains at historically high levels, and economic recoveries in other parts of the world will further weaken the US growth advantage. Meanwhile, central banks around the world are still accumulating gold at record levels, further diverting demand for dollar-denominated assets.
From the foreign exchange market to global asset allocation, the dollar's downward trend has triggered a chain reaction. The decline in 2026, driven by policy divergence, valuation bubbles, and the loosening of the reserve currency status, may reshape the global financial landscape. $BTC
