The US dollar fell sharply in 2025, especially against the Brazilian Real –10.27% and the Mexican Peso -13.7%. In 2026, US interest rates will probably go down materially; President Trump appointing a Fed Chair more to his liking regarding rates will increase the chances of notably lower US interest rates. If US rates go down significantly, the US dollar will weaken. The key question is how much of the dollar weakness that has occurred in 2025 is discounting the move down in 2026?
If a lot of the future dollar move has been discounted, factored into investment decisions and portfolio structure, the US dollar may not decline much. But it will probably not go up.
If investors have not discounted the 2025 downward move fully, it could get ugly for the US dollar if the new Fed Chair starts lowering interest rates more aggressively than Chairman Powell's measured approach.
Declining US interest rates will cause investors to seek higher return investments, high yielding loans or stocks, for example. If lower interest rates drive investors into stocks, the bubble that has been created will expand, and its eventual popping will be severe. Lower interest rates could also force lenders to "chase yield" and lend to less than quality counterparties, like was done in the 2008 financial crisis. This is not a good thing, for already there are concerns about the state of the private credit market, a high yielding space.
So, drastically lower US interest rates in the US may not be the best thing at this point in the cycle for US capital markets. The economy, probably.
Diversification into non-US dollar assets is a good way to avoid landmines in loans and stocks, be they DeFi or TradFi instruments. In this regard, emerging market sovereign bonds make sense; sovereign bonds are backed by the full faith and power of a government. If an investor stays in short maturities like 90 days or less the bond is more like cash and less susceptible to interest rate shocks.
Etherfuse's tokenized Brazilian bonds pay 9.44% more than Etherfuse tokenized US Treasuries, and Mexican CETES pay 2.21% more. If these spreads hold in 2026, the US dollar will have to appreciate by more than 2.2% and the Brazilian Real by 9.46%. These spreads seem stable, as the US dollar does not seem to be positioned to appreciate in 2026, given drastically lower interest rates, fiscal uncertainty, and the upcoming political uncertainty of US mid-term elections.
At present Etherfuse Brazilian Tesouros offer an APY of 13.21% and CETES 5.98%. Etherfuse's US Treasury is 3.78%. If these spread differentials remain and the US dollar goes down a small amount like 5% the return in Brazilian stable could be 16-18% in US dollar terms and CETES 8-10%.
If the 2025 US dollar move has not fully discounted dollar weakness, in 2026 the US dollar could decline more. Given this, now is the time to move from USDC, which pays no interest, into tokenized local government bonds.
This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.
