Investors have been holding unhedged US dollar assets to capture both high yields and currency appreciation, a speculative strategy traditionally used for emerging market local currency bonds. This parallel indicates a shift in risk perception, where US assets are no longer seen as a pure safe haven.

While U.S. fiscal deficits remain high, new tariffs are reducing the trade deficit. This means fewer U.S. dollars are flowing abroad to foreign entities who would typically recycle them into buying U.S. assets like treasuries. This dynamic creates a dollar liquidity crunch, strengthening the dollar.

A weakening dollar reduces the credit risk for dollar-borrowers, which encourages more dollar-denominated lending. This credit is the lifeblood of intricate global supply chains. As a result, exports of sophisticated goods, like semiconductors, can thrive even during periods of dollar weakness.

Despite a popular bearish narrative, the U.S. Dollar has a strong bullish case. The U.S. economy is accelerating while Europe and Japan face stagflation, and record short positioning creates fuel for a squeeze. The argument is that U.S. stocks are essentially levered U.S. dollars, and relative strength will attract capital.

A recent global fixed income sell-off was not triggered by a single U.S. event but by a cascade of disparate actions from central banks and data releases in smaller economies like Australia, New Zealand, and Japan. This decentralized shift is an unusual dynamic for markets, leading to dollar weakness.

The primary risk for the U.S. is not the inevitable decline of the dollar's dominance, which could rebalance the economy. The danger lies in trying to fight this trend, leading to a disorderly and painful collapse rather than a graceful, managed transition from a position of strength.

The U.S. dollar's decline is forecast to persist into H1 2026, driven by more than just policy shifts. As U.S. interest rate advantages narrow relative to the rest of the world, hedging costs for foreign investors decrease. This provides a greater incentive for investors to hedge their currency exposure, leading to increased dollar selling.

The US dollar reached its peak global dominance in the early 2000s. The world is now gradually shifting to a system where multiple currencies (like the euro and yuan) and neutral assets (like gold) share the role of reserve currency, marking a return to a more historically normal state.

Recessionary risks are higher in Canada and Europe than in the U.S. This weakness doesn't drag the U.S. down; instead, it triggers capital flight into U.S. assets for safety. This flow strengthens the dollar and reinforces the American economy, creating a cycle where U.S. strength feeds on others' fragility.