Ray Dalio warns of dollar destabilization as political polarization threatens fiat currencies in 2026

Source: Yellow Original Title: Billionaire Ray Dalio Sees Dollar Destabilization as Political Polarization Threatens Fiat Currencies

Original Link: The billionaire investor and hedge fund manager Ray Dalio warned on Monday that markets might be underestimating the political forces now shaping the value of money, as the United States heads into an intensified conflict over wealth, inflation, and economic power.

In a year-end reflection on global markets, Bridgewater Associates founder said that the most important story of 2025 was not the rebound of U.S. stocks or the enthusiasm around artificial intelligence, but the erosion of fiat currencies and the growing divide between political ideologies that could further destabilize the dollar.

Dalio described a “big fight brewing” between pro-capitalist policies and a resurging democratic socialist movement on the left, a clash that, he said, is increasingly focused on who bears the cost of inflation and who benefits from rising asset prices.

Currency risk could overshadow growth narratives in 2026

Dalio stated that the most important lesson from recent market behavior is that asset prices should be evaluated through the lens of purchasing power, not nominal returns.

Although U.S. stocks and AI-linked securities captured investors’ attention, Dalio pointed out that fiat currencies generally weakened, disrupting the real distribution of wealth.

Gold, which Dalio describes as the only major non-fiduciary currency and the second-largest reserve asset in the world, significantly outperformed stocks and bonds.

He noted that this divergence signals a growing preference for assets perceived as stores of value, as investors reassess the long-term sustainability of debt-driven monetary systems.

Looking ahead to 2026, Dalio expects currency movements to play a more central role in investment outcomes, especially if fiscal expansion and monetary easing persist in major economies.

Capital flows could continue to move away from U.S. markets

Dalio also highlighted a trend that could intensify next year: the reallocation of global capital away from U.S. assets.

Despite strong headline returns in dollar terms, U.S. stocks lagged behind international markets when measured in stronger currencies and against gold.

European, Chinese, Japanese, and emerging market equities offered relatively higher returns, a pattern Dalio attributed to diversification against U.S. policy risk, rising debt levels, and geopolitical uncertainty.

He warned that foreign appetite for U.S. bonds, cash, and equities could remain weak in 2026 as investors continue hedging against currency depreciation and political fragmentation.

Debt markets face structural pressures

Dalio expressed particular caution regarding debt assets in the coming year.

He pointed out that bonds represent claims on future money, making them vulnerable when the value of money declines.

With a significant volume of public debt scheduled for refinancing and credit spreads already compressed, he said the scope for new gains appears limited.

Although the Federal Reserve is expected to favor policies that suppress real interest rates, Dalio questioned whether monetary easing alone can offset supply-side pressures in the bond market.

He suggested that yield curves could continue to steepen, reflecting increased risk premiums and concerns over long-term debt sustainability.

Politics and the Great Cycle gain prominence

Dalio framed the outlook for 2026 within what he calls the “Great Cycle,” where monetary, political, and geopolitical forces converge.

He said U.S. policy has amplified these dynamics through aggressive fiscal stimulus, protectionist trade measures, and a shift toward government-directed capitalism.

Dalio argued that these policies have supported asset prices but also widened wealth disparities and intensified political polarization.

He warned that affordability and the decreasing value of money could emerge as central political issues, with potential implications for markets as election cycles approach.

Globally, Dalio said that the transition from multilateral cooperation to unilateral decision-making based on power will likely drive increased military spending, higher debt levels, and sustained demand for alternative reserve assets.

A different market manual for 2026

Dalio cautioned that many liquid assets now appear fully valued after years of reflation, leaving limited upside potential unless productivity gains materially exceed expectations.

He also noted that illiquid markets such as private equity, venture capital, and real estate remain under pressure, as higher financing costs challenge previous valuation assumptions.

For investors, Dalio’s message is less about specific trades and more about mindset.

He suggests that 2026 could reward strategies focused on preserving real wealth, managing currency exposure, and diversifying across different geopolitical regimes, rather than simply chasing growth narratives.

In his view, the key question for markets next year is no longer which assets will grow fastest, but what forms of money will maintain their value as the global financial order continues to evolve.