The performance of the US dollar index (DXY) over the past year has indeed been somewhat surprising. It declined by 9.4% for the year, marking the worst annual performance since 2017, falling from over 110 at the beginning of the year to around 98.2 at year-end, with a low of 96.2 at one point.

Why is this happening? The reasons are actually not complicated. First, the US labor market is cooling down. The rebound in continued unemployment claims is a clear signal, indicating that job market heat is not as intense. Additionally, the Federal Reserve cut interest rates a total of 75 basis points throughout the year, and the easing policy directly weakened the dollar's attractiveness.

But there is a deeper contradiction behind this: the scale of US debt has exceeded $37 trillion, and the fiscal deficit remains high. High interest rates increase debt servicing costs, so there is a strong call for rate cuts. However, the pace of inflation decline is uncertain, which limits the Federal Reserve's room for further easing. The policy dilemma is becoming increasingly apparent.

The interest rate differentials among major global central banks are also converging, further weakening the dollar's relative advantage. The overall landscape has become more fragile.

Looking ahead to 2026, the market generally expects the Federal Reserve to cut interest rates by another approximately 50 basis points. Under this expectation, the dollar is likely to continue fluctuating downward. The core range of this volatility should be between 95 and 101. From another perspective, what does this mean for asset allocators?