RBC Capital Markets is warning traders to brace for a potential protracted sell-off in the US dollar, drawing parallels to the boom-and-bust cycle of the internet bubble. According to RBC, the factors currently supporting the currency could soon turn into headwinds. The US dollar has already faced challenges this year due to uncertainty surrounding President Trump’s policies. However, it has found support from a strong stock market and US asset allocations from global investors, particularly large, passive investment funds.
Over the past two decades, global investors have increasingly favoured US assets, especially stocks, driving flows into the dollar. RBC currency strategist Richard Cochinos suggests that this concentration, while beneficial in the past 15 years, now presents risks. A significant change in demand and relative performance could have profound implications for foreign exchange markets.
Cochinos noted that a capital diversification event, similar to what occurred after the internet bubble burst in 2000, could trigger a substantial downturn in the US dollar. This decline could mirror the currency’s 40 per cent peak-to-trough fall from 2001 to 2008. RBC Capital Markets is a global investment bank providing services in banking, finance and capital markets to corporations, institutional investors, asset managers and governments worldwide.
Looking ahead, Cochinos highlighted high valuations, evolving trade paradigms, and shifting safe-haven assets as challenges for the US dollar. He advised that “longer-term tail risk management should be top of mind as we move into 2026”. To mitigate the risk of a long-term decline in the dollar’s value, RBC recommends traders consider various strategies, including synthetic call options on the ICE US Dollar Index and bullish binary options on the euro and yen.
