This year has been a whirlwind for global markets, characterized by rapid news cycles, geopolitical shocks, and significant market volatility.
Businesses experienced whiplash from sudden market sell-offs followed by sharp rebounds. Despite this roller-coaster ride, global economic growth was mainly steady, and equity markets in the US, Canada, UK, Germany, and Australia reached all-time highs. This environment underscored the importance of long-term strategy amid short-term volatility.
Looking ahead to 2026, the global economy faces a new set of challenges and opportunities, demanding adaptability and strategic foresight from cross-border businesses.
Download the full Are You Ready for 2026? global economic forecast to gain a deep understanding of global growth expectations and the realities of a weakening labor market and escalating trade disputes.
Key economic risks to watch in 2026
In September, revised data revealed that the US added 911,000 fewer jobs than previously reported for the 12 months leading up to March, signaling fading momentum in the labor market.
This trend has played out amid the uncertainty of the Trump administration’s tariff strategy, which has disrupted supply chains and distorted trade flows.
While global trade rose by an estimated $300 billion in the first half of 2025, volumes increased by only 1%, indicating price inflation rather than real expansion.
The pressures of labor softness and trade volatility have fueled wild market fluctuations. The VIX (or the stock market’s “fear index”) surged above 50, reaching levels last seen during the COVID-19 pandemic and the 2008 global financial crisis, while the US dollar posted its worst first-half performance since 1973.
In the coming year, it will be even more critical and difficult than ever to stay on top of these economic shifts.
De-globalization and the return of tariffs
With economies such as the UK, Sweden, Germany, and South Korea remaining deeply tied to global value chains, the acceleration of trade wars and de-globalization has been deeply concerning. These countries, with more than 60% of their GDP dependent on trade, experienced significant currency volatility.
The steep tariffs imposed by the Trump administration in 2025 added another layer of complexity to an already fluid global trade system.
McKinsey experts estimate that up to $3 trillion in trade revenue may fail to materialize by 2035 due to this global trade restructuring.
Additionally, central bank moves to cut interest rates to support economies can be a double-edged sword. A weaker exchange rate, while offsetting tariff shock, simultaneously increases import costs, acting as a self-imposed tariff.
This dynamic could weigh on business margins and investment, particularly in industries that rely on foreign goods and services.
However, this restructuring also creates opportunities for third countries and regional hubs that can intermediate trade or absorb rerouted supply chains, with Mexico standing out as a prime example.
Will monetary policy loosen — or tighten?
As central banks face mounting pressure from rising debt and shifting political agendas, their independence has become increasingly compromised. The US Federal Reserve, for example, confronts a “new era of fiscal dominance” where its policy is influenced by the government’s need to manage massive debt loads.
In its recent five-year monetary policy review, the Fed noted that the neutral interest rate “may now be higher than during the 2010s, reflecting changes in productivity, demographics, fiscal policy, and other factors that affect the balance between saving and investment.” This implies that bringing inflation back to target may require a more substantial economic slowdown than anticipated.
While the Fed may lower rates to 2.75-3.25% by mid-2026, sticky inflation and trade tariffs could delay cuts, risking a “higher for longer” scenario.
In contrast, monetary policy in Europe and Japan is expected to diverge from the US and UK in 2026. The European Central Bank (ECB) is likely to continue its easing cycle, with eurozone inflation projected to fall below its 2% target. The Bank of Japan is expected to continue its slow exit from ultra-loose monetary policy, pursuing modest rate hikes as inflation stabilizes around its 2% target.
With monetary policy entangled with debt dynamics, political trade-offs, and market confidence, even advanced economies with historically independent central banks are now constrained by fiscal realities.
As this shift continues into 2026, we could see the conclusion of the global rate-cutting cycle that largely began in 2024.
The US dollar: Losing dominance or holding strong?
The debate over de-dollarization intensified in 2025, driven by a rare weakening of US stocks, bonds, and the dollar during a risk-off phase.
While the dollar’s safe haven status showed signs of strain, its role as the world’s reserve currency is not under immediate threat; however, markets are now placing greater emphasis on US policy credibility. The dollar’s anchor status can no longer be taken for granted, marked by central banks diversifying their reserves away from USD, especially in emerging markets.
The way global trade is invoiced is similarly shifting, as more commodities are now priced in non-USD currencies.
The growing use of digital currencies and alternative payment systems for cross-border transactions is further accelerating the move away from USD.
Still, the currency remains globally relevant, comprising about 90% of FX transactions, 66% of international debt, and 58% of foreign exchange reserves.
In 2026, de-dollarization is likely to remain a persistent trend, but it is not accelerating at a pace that fundamentally threatens the dollar’s global role in the near term.
Meanwhile, the euro has strengthened its profile as a credible alternative — 55% of global AAA bonds are now euro-denominated — despite structural hurdles to becoming a true standard-bearer in the long-term.
Geopolitical tensions reshape FX markets
Once confined to wars and terrorism, geopolitical risks now include economic fragmentation, trade isolation, and the rise of protectionist policies. Coupled with the increasing frequency of shocks, this new dynamic has dampened growth prospects for businesses and introduced new layers of uncertainty.
This unpredictable environment will affect asset classes differently, with export-driven economies potentially benefiting from rising commodity prices during conflict, while import-heavy regions face headwinds.
Fiscal risk premiums are diverging across countries, reflecting differences in defense capacity and strategic exposure. The ECB notes that EU nations closer to Russia or those ramping up defense spending are already seeing upward pressure on sovereign yields.
To navigate this new terrain, international businesses and investors must embrace more dynamic frameworks, such as scenario analysis and stress testing.
Opportunities in a fragmented global economy
Despite the challenges, a fragmented global economy presents unique opportunities for global businesses and institutions that can adapt to the new reality.
The restructuring of trade routes and supply chains creates openings for third-party countries and regional hubs. Similarly, businesses can mitigate frictions by rethinking inventory management, tightening receivables, and adjusting credit strategies to maintain healthy cash flow.
The shift toward unorthodox fiscal discipline means exchange rates are more sensitive to policy surprises, necessitating proactive risk protection. Investors now require a premium to compensate for perceived risk, and real interest rates (accounting for inflation) are increasingly prioritized over nominal yields.
Driven by unpredictable news, such as a surprise shift in forward guidance or unforeseen geopolitical events, currency volatility is expected to continue in 2026, providing opportunities for companies that make and receive cross-border payments to level up their FX strategies and consider hedging against risks using tools like forward contracts.
Final thoughts: How to prepare your businesses
Success in 2026 will depend on the ability of global businesses to mitigate frictions, manage volatility, and unlock growth in an increasingly complex world. This requires a deep understanding of the evolving monetary policy landscape, the shifting dynamics of the US dollar, and the pervasive influence of geopolitical tensions.
Businesses must move beyond traditional FX playbooks and embrace a broader set of variables, including risk premiums, real returns, and the market’s reaction to unexpected events.
By adopting dynamic frameworks, building resilient strategies, and staying agile in the face of uncertainty, decision-makers can achieve better financial outcomes in the year ahead.
Download the full Are You Ready for 2026? report to explore how your business can navigate these challenges.
