By Findlay Franklin, portfolio manager at RBC BlueBay Asset Management
We are just one third into the year, and yet it’s already clear to see that the defining investment question of 2026 is how global confidence in US assets – and even the dollar – is evolving in a far more contested geopolitical environment.
This year’s debates around diversification, correlation, and policy risk are unfolding against a backdrop of unusually elevated geopolitical stress. The escalation of tensions between the US and Iran, alongside persistent trade frictions and a more assertive use of economic statecraft, has sharpened investor focus on political risk in places once assumed to be largely immune from it. While none of this constitutes an imminent challenge to the dollar’s dominance, it does signal a transition into a new phase for global capital markets.
The dollar’s institutional foundations remain formidable. Its depth, liquidity, and unrivalled role in global trade and finance are not meaningfully replicable in the foreseeable future. There is no single alternative currency capable of absorbing the reserve, settlement, and collateral functions that the dollar performs today. Yet reserve currency status is not binary. It rests as much on confidence and predictability as it does on scale. That nuance matters.
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Domestically, US policy continues to reflect a clear interest in preserving the integrity of the dollar system. The administration has shown little appetite for destabilising capital markets or undermining the Federal Reserve’s role in anchoring inflation expectations. At the same time, there is greater sensitivity to the distributive and geopolitical effects of currency strength, particularly against key Asian trading partners such as Japan and South Korea.
In turn, investors are responding less to rhetoric and more to behaviour. The events of early 2026, including the US–Iran conflict as interpreted and priced by financial markets, reinforced a broader trend: political risk is no longer geographically siloed. As a result, global investors are reassessing concentration risk, hedge ratios, and currency exposure with renewed urgency.
Hedging activity itself tends to exert modest downward pressure on the dollar over time, but the more important development lies elsewhere. Many emerging market sovereign balance sheets have strengthened materially over the past decade. Lower leverage, longer debt maturities, and improved external positions mean that, in several cases, emerging markets now present cleaner fiscal profiles than some developed peers.
When combined with resilient domestic growth, supply‑chain realignment following years of tariffs and industrial policy, and a more predictable if less dominant dollar, this creates additional flexibility for emerging market central banks. Rate cuts in these economies are increasingly driven by domestic conditions rather than defensive responses to US tightening cycles.
The early months of 2026 have quietly challenged one of global investing’s most persistent assumptions: that the US must always be the primary engine of returns. Yes, while US equities continue to command global attention, some of the strongest fixed income performance this year has emerged far from US markets and far from the investment mainstream.
These returns were not the product of global risk‑on sentiment, nor derivative of US equity dynamics. Instead, they reflected local catalysts — political reform efforts, debt restructuring processes, and incremental economic stabilisation.
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Crucially, these outcomes have been largely uncorrelated with the volatility stemming from US data releases, central bank communication, or geopolitical headlines. In a year marked by heightened uncertainty, that independence has become a feature rather than a footnote.
This divergence underscores a broader lesson. Diversification has not failed; passive diversification has. In a world increasingly defined by dispersion, between economies, policy cycles, and geopolitical alignments. active exposure to idiosyncratic risk is becoming more valuable, not less.
Distressed and emerging market debt sits at the centre of that opportunity set. These markets respond primarily to domestic developments rather than global narratives. They are shaped by negotiation tables rather than earnings calls, by reform agendas rather than inflation prints.
Meanwhile, US assets continue to play a central role in global portfolios. The dollar remains the anchor of the international financial system. But anchors, by definition, are relied upon most during rough seas. The geopolitical events of 2026 have reminded investors that stability is not static — it is maintained through credible policy, institutional strength, and confidence earned over time.
The story of the dollar today is not one of displacement, but of adaptation. In that sense, the shifting global allocation of capital reflects not the decline of the US, but the maturation of a more genuinely multipolar investment world.
