Standard Chartered: Dollar Could Face Significant Decline in 2026

The US dollar faces a significant risk of depreciation over the next year if Donald Trump's policies increase the US debt burden without stimulating the economy, according to Standard Chartered.

In a research note, the bank noted that US government debt, along with amounts owed to foreign investors, have risen simultaneously in recent years, exposing the dollar and US Treasuries to the risk of a loss of confidence among foreign investors as the impact of borrowing becomes clearer in the long run.

Steve Englander, head of G10 global currency research at the bank, wrote that the widening US budget deficit reduces domestic saving and increases the need for foreign saving, which is reflected in the widening current account deficit. 

He explained that maintaining this high deficit could become extremely difficult in the coming months if Trump's policies fail to boost growth and foreign investors lose confidence.

"If the economy or financial markets slow down, the downside risks to the dollar increase as the volume of external liabilities increases," Englander said. Foreign creditors' concerns about debt sustainability are likely to increase if tariffs and tax policies fail to stimulate growth, adding that this concern "will likely manifest itself in the form of risk premiums, whether through higher interest rates or a weaker dollar."

The dollar and Treasury bonds have already been under pressure due to Trump's aggressive tariffs and the accompanying confusion over implementation, leading some investors to question the stability of US assets. Although Trump has demonstrated a willingness to negotiate on trade policy, investors' focus has begun to shift to fiscal issues and the size of the new debt resulting from the trillion-dollar tax bill.

The bank said that foreign investors remain reluctant to completely abandon safe-haven US assets, waiting to see whether Trump's policies will generate economic growth. According to Englander, the tax bill could provide a boost to the economy this year if passed, but this effect could fade by mid-2026 or 2027, bringing concerns about the long-term impact on growth and debt back to the forefront.

Englander predicted that investors would be cautious about increasing their exposure to the dollar if trade policies remained volatile, which could lead to a significant movement in the dollar's value. He added that improved growth prospects in China and Europe could increase selling pressure on the dollar.

He noted that the effectiveness of any monetary policy easing by the Federal Reserve could be limited, as the decline in short-term bond yields may not extend to long-term bonds if investors perceive that the usual increase in deficits during recessions reinforces an unsustainable debt path.

He explained that the United States may not face the risk of bankruptcy as long as the government can issue dollar-denominated debt, but he warned that an actual default through inflation risks could become a tangible risk.

He concluded by saying, "If the debt trajectory is not curbed, borrowing terms could gradually become more expensive, with risk premiums rising, increasing the cost of borrowing for both the public and private sectors."