Last week, we kicked off our 2026 prediction series, one of the most important things we’ll do all year.
Our take on the direction of key markets is one of the most valuable things we can share with you. Getting the direction of a market move right is one of the most important factors in long-term investing success.
We don’t care about the exact price. What we want to determine is the direction, higher or lower. That will help set us up for next year, making adjustments to be in a position to outperform.
We started off by looking at interest rates. And as we told you last week, we believe interest rates are heading lower. In part because after a historic rise – with the Federal Reserve increasing rates at the fastest pace in history and keeping them there – we’re entering a new rate-cutting cycle.
Something the Fed confirmed on Wednesday by lowering its benchmark interest rate another quarter point to 3.75%.
Since interest rates tend to shift depending on the Fed’s overnight lending rate, we’ll track that prediction by following the benchmark 10-year U.S. Treasury yield.
We also said that while lower rates might mean a cheaper mortgage in the short run, there’s a long term effect in play. And we think President Trump’s economic team has its eye on it by design.
So today, we’ll take a look at the U.S. dollar and where we think its heading in the year ahead.
U.S. Dollar
In our view there’s a grand plan in the works. If you plan to be financially self-sufficient it should matter to you a lot.
The plan is to whittle away the value of the U.S. dollar in a way you’ll barely notice.
Why does the Trump economic team want a lower dollar value? The simple answer is because that’s how it accomplishes the reshoring of manufacturing back into the U.S.
When the dollar is strong, it makes importing goods from other countries cheaper. When it’s weak, it makes domestic production more competitive. So a weaker dollar is key to bringing more manufacturing back to the U.S.
And we’re already starting to see the plan for a weaker dollar take shape as you’ll se below.
However, predicting the value of the dollar is complicated. You have to have something to compare it to. That just happens to be a basket of other currencies like the euro, the Japanese yen and others. We measure this through the U.S. Dollar Index (DXY).
As you can see in the chart, after reaching a short-term peak about a year ago, DXY is a decent amount off that high.
Yet, that only tells a short part of the story with the dollar. As we said above, the plan is to whittle away the value of the dollar over time. Something we can show you if we zoom out a bit.
Taking the chart back to 1980 shows you a clearer picture of what we mean. It shows that the value of the dollar is still in terminal decline. It may have its surges here and there, but the trend is clear.
To make this more plain, let’s go back to 1995. The chart below shows the U.S. 10-year Treasury yielded 7.85% at the start of that year.
The U.S. median household income at that time was roughly $33,000. That means holding $1 million worth of 10-year treasury bonds produced more than double the median nationwide household income. In simple terms you could live twice as well as the average dual-income family of four. All from saving well and conservatively owning treasuries.
Today the U.S. median household income is just over $83,000. That means the average family of four earns two-and-a-half times what it did in 1995. Most people feel good about that.
However, you’d need over $4 million worth of 10-year treasury bonds to produce twice the median household income with Treasury yields around 4% today. And if, as we predicted last week, interest rates head lower, you’ll need even more to produce a sufficient income going forward.
That’s how you erode the value of the dollar over time. Slowly reducing its ability to save and earn a decent income in what most consider a safe, sturdy asset.
The big problem with the dollar though is that it’s both a benefit and a curse. We price everything in dollars because it’s the world’s reserve currency.
But when you flood the system with massive dollar spending programs, and especially taking on debt to fund those programs, it puts pressure on the price of everything. It even forces incomes to adjust upwards in nominal terms.
And as we showed you last week, the growing national debt pile shows no signs of slowing down.
It’s part of how we get inflation. When it’s in check, it makes you feel wealthier. But your purchasing power slowly erodes along the way through a devalued dollar.
Even if inflation runs at the Fed’s target rate of 2% per year, it will still make your dollars worth less over time.
Now, we should say that where interest rates go, the dollar tends to follow. When interest rates rise, you typically see the value of the dollar head higher. When they fall, the dollar tends to follow.
So just as with last week’s prediction of lower interest rates in 2026, we’re predicting we see the dollar weaken against other currencies.
If we’re right, this will setup how we view other assets for the coming year. Something we’ll discuss in Part III of our prediction series in the coming days.
Regards,
Editor, Strategic Trader