RBC Warns of Potential Major Downturn in US Dollar as Market Drivers Shift

Highlights:

• RBC Capital Markets cautions traders about a prolonged downside risk for the US dollar
• Market support from US equities and global capital flows may be nearing exhaustion
• Longer-term hedging strategies encouraged as structural pressures emerge

The Royal Bank of Canada (NYSE: RY), through its investment research division RBC Capital Markets, has issued a cautionary outlook on the US dollar, suggesting that traders could face a prolonged period of depreciation once the current support mechanisms begin to fade. The bank’s analysts argue that the currency may be entering a vulnerable phase similar to past boom-and-bust market cycles, including the downturn that followed the internet bubble in the early 2000s.

At the time of writing, the US dollar remains under pressure, having already weakened this year amid uncertainty surrounding domestic policy direction and shifting investor sentiment.

Market Positioning May Unwind

According to RBC currency strategist Richard Cochinos, the dollar has been propped up by strong global demand for US equities and large-scale passive investment flows. Over the past two decades, international capital has increasingly concentrated in US markets, reinforcing dollar strength through allocation patterns.

However, Cochinos noted that heavy concentration in one region amplifies risk when economic or performance trends shift. If global investors begin reallocating funds to other markets, the dollar could face a decline comparable to the 40% peak-to-trough slide recorded between 2001 and 2008.

Structural Challenges Ahead

RBC highlighted several emerging headwinds: elevated asset valuations, changes in global trade relations, and evolving safe-haven preferences. The bank suggested that long-term risk management should take priority as markets approach 2026.

To hedge against a sustained decline in the dollar, RBC recommends strategies including synthetic call options on the ICE US Dollar Index, as well as bullish positioning in the euro and Japanese yen.

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