Ray Dalio's 2025 'Biggest' Story: The Dollar Debasement

Ray Dalio’s year-end reflection for 2025 underscores the dominance of currency dynamics and global capital reallocation as the year’s defining market forces. The US dollar weakened significantly against gold and major currencies, while gold emerged as the top-performing asset class, returning 65% in dollar terms. By comparison, the S&P 500 rose only 18%, and when measured in gold, US equities actually declined by 28%.

Dalio argues that fiat devaluation masked the true performance of US stocks. Investors based in stronger currencies like the euro or Swiss franc saw minimal returns, while gold-based investors experienced outright losses in US equities. The weakening dollar reflects broader concerns about the erosion of purchasing power and the appeal of alternative assets.

Non-US equities outperformed US stocks by double-digit margins, with European, Chinese, UK, and Japanese markets all beating the S&P 500. This trend reflects a broader reallocation of capital away from the US, driven by structural fiscal imbalances and shifting expectations for monetary policy.

Why Did This Happen?

The devaluation of the dollar is linked to structural fiscal pressures and the Federal Reserve’s accommodative policy. Dalio estimates that nearly $10 trillion of US debt will need to be rolled over in coming years, and with Fed easing likely, long-duration debt assets appear unattractive. This environment has pushed investors toward assets with more tangible value, including gold and non-US equities.

Geopolitical shifts also played a role. The move from multilateralism to unilateralism increased the use of economic threats and sanctions, contributing to the demand for gold. This shift also reduced foreign appetite for US debt and dollar-denominated assets.

How Did Markets Respond?

The S&P 500 outperformed in nominal dollar terms, but this was driven by earnings growth and valuation expansion, particularly among the so-called Magnificent Seven companies. However, Dalio cautions that political pressures to redistribute income and address wealth inequality could challenge the sustainability of these gains.

Bond markets also faced headwinds. While US Treasuries posted positive nominal returns, their real value declined due to inflation and currency depreciation. For investors measuring returns in stronger currencies or gold, US bonds delivered negative outcomes.

The US yield curve has steepened to its most extreme level since 2021, with the spread between two-year and 30-year Treasuries reaching 140 basis points. This reflects expectations of policy rate cuts and higher compensation for holding long-term government debt amid inflation uncertainty and heavy Treasury issuance.

What Are Analysts Watching Next?

Dalio warns of stretched valuations and low equity risk premiums, estimating long-term expected equity returns at under 5%. With little room left for further compression in risk premiums, markets could be vulnerable if interest rates rise amid growing debt supply and weakening demand for government bonds.

Political developments also loom large. Dalio expects the affordability issue to be the top political issue in 2026, contributing to Republican losses in the House and a very interesting 2028 election. A shift in the balance of power could reverse pro-crypto regulatory policies under the Trump administration.

Investors are advised to hedge their currency exposures and consider their least-risk currency mix. This approach helps mitigate the volatility of exchange-rate swings and aligns with Dalio’s emphasis on systematic analysis over headline narratives.

The broader economic landscape is shaped by debt and money dynamics, domestic politics, geopolitics, climate-related pressures, and technological change. These forces align with long-term historical patterns described in Dalio’s work on major economic cycles.

With these trends in mind, investors are encouraged to build robust decision-making frameworks and understand the cause-and-effect relationships in markets. This approach is essential for navigating increasingly complex global conditions.