Global demand for dollars as the reserve currency forces the U.S. to run persistent trade deficits to supply them. This strengthens the dollar and boosts import power but hollows out the domestic industrial base. A future decline in dollar demand would create a painful economic transition.

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.

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 inflation market's reaction to tariff news has fundamentally shifted. Unlike in the past, recent tariff threats failed to raise front-end inflation expectations. This indicates investors are now more concerned about the negative impact on economic growth and labor markets than the direct pass-through to consumer prices.

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.

'Fiscal dominance' occurs when government spending, not central bank policy, dictates the economy. In this state, the Federal Reserve's actions, like interest rate cuts, become largely ineffective for long-term stability. They can create short-term sentiment shifts but cannot overcome the overwhelming force of massive government deficit spending.

For decades, a tacit global agreement existed: the U.S. buys the world's goods and provides security, and in return, the world finances U.S. debt by buying Treasuries. As U.S. policy shifts towards protectionism and reduced global policing, other nations may no longer feel obligated to fund U.S. deficits, pushing borrowing costs higher.

Unlike in 1971 when the U.S. unilaterally left the gold standard, today's rally is driven by foreign central banks losing confidence in the U.S. dollar. They are actively divesting from dollars into gold, indicating a systemic shift in the global monetary order, not just a U.S. policy change.