The Dollar's Resilience Amid Trumpian Geopolitical Risk: A Reassessment of Carry Trade and Currency Strategy in 2026

The U.S. dollar's performance in 2026 has defied conventional wisdom, with its resilience rooted in a combination of robust economic fundamentals and evolving global dynamics. Despite persistent geopolitical risks-including escalating tensions in the Middle East, the protracted war in Ukraine, and fragile U.S.-China relations-the dollar has maintained its dominance as a reserve and safe-haven currency. This analysis argues that the interplay of strong labor market data, controlled inflation, and speculative positioning shifts has created a compelling case for rethinking dollar-bullish strategies, even in an era of de-dollarization.

Economic Fundamentals: A Foundation for Stability

The December 2025 jobs report underscored the U.S. labor market's enduring strength, despite its weakest annual growth since 2003. The addition of 50,000 nonfarm payrolls and an unchanged unemployment rate of 4.4% highlighted a labor market that, while slowing, remains structurally resilient. Wage growth, rising 3.8% year-over-year to $37.02 per hour, further reinforced this narrative, indicating that inflationary pressures-though persistent-are not spiraling out of control.

Meanwhile, the Federal Reserve's cautious approach to rate cuts has provided a floor for the dollar. While analysts project one or two rate reductions in 2026, the Fed's reluctance to overcorrect for inflation-given sticky services-sector price pressures and expansionary fiscal policies-has preserved the dollar's appeal. JPMorgan's assessment that the U.S. economy has an 80% chance of remaining in expansion mode through 2026 adds further weight to the argument that the dollar's economic underpinnings remain intact.

Speculative Positioning: A Contrarian Signal

Speculative positioning in the foreign exchange market reveals a striking disconnect between short-term expectations and long-term fundamentals. The U.S. dollar's net short positions have reached multi-year highs, reflecting widespread bets on its continued weakness. However, this positioning creates a self-correcting mechanism: as short-sellers face margin calls or forced unwinding, the dollar could experience short-covering rallies, particularly if geopolitical risks materialize or the Fed signals tighter policy.

This dynamic is amplified by the dollar's role as a safe-haven asset. While global markets have diversified away from the dollar to some extent-driven by improved emerging-market fundamentals and regional currency blocs-the U.S. currency remains the default refuge during periods of uncertainty. For instance, during the Venezuela economic crisis in 2025, the dollar steadied despite broader market volatility, illustrating its enduring appeal.

Geopolitical Risks: A Muted Threat

Geopolitical tensions, often cited as a drag on dollar strength, have paradoxically reinforced its resilience. The U.S. dollar's status as a global reserve currency ensures that conflicts in regions like the Middle East or the Indo-Pacific are more likely to bolster demand for the dollar than undermine it. UBS analysts note that while dollar weakness is expected in the first half of 2026, its rebound in the second half will be driven by fiscal stimulus and trade tariffs, which insulate the U.S. economy from external shocks.

Moreover, structural changes in global markets have reduced the dollar's vulnerability to regional crises. For example, Argentina's successful disinflation (projected at 13.7% in 2026) and Canada's near-target inflation (2%) demonstrate that localized volatility no longer cascades into systemic dollar weakness. This fragmentation of inflationary pressures has allowed the U.S. to maintain a relatively stable macroeconomic environment, even as geopolitical risks persist.

Carry Trade and Currency Strategy: A Reassessment

The carry trade-borrowing in low-yielding currencies to invest in higher-yielding ones-has traditionally favored risk-on environments. However, the dollar's 2026 trajectory suggests a shift in this paradigm. With U.S. interest rates expected to remain above those of major peers (e.g., the euro and Australian dollar), the dollar's yield advantage will persist, making it an attractive funding currency for carry trades.

At the same time, the dollar's potential for short-covering rallies introduces tactical opportunities. Investors who have positioned for dollar weakness may find themselves exposed to sudden reversals, particularly if the Fed adopts a hawkish stance or geopolitical tensions escalate. This volatility, while risky, could be harnessed through hedging strategies that capitalize on the dollar's dual role as both a yield-bearing and safe-haven asset.

Conclusion: Dollar Resilience in a De-Dollarization Era

The U.S. dollar's resilience in 2026 is a testament to the strength of its economic fundamentals and the evolving nature of global risk. While de-dollarization trends and geopolitical uncertainties have introduced new variables, they have not eroded the dollar's structural advantages. Instead, they have created a landscape where the dollar's role as a reserve currency is reinforced by its stability and liquidity.

For investors, this suggests a rethinking of dollar-bullish positioning. The combination of controlled inflation, a resilient labor market, and speculative positioning imbalances points to a currency that is neither in terminal decline nor in a sustained rally. Rather, the dollar is in a phase of recalibration-one that offers both risks and opportunities for those who understand its dynamics.