Dollar Faces Continued Weakness as Global Confidence in U.S. Assets Wanes

The U.S. dollar is facing mounting pressure as investors increasingly perceive it as overvalued, despite recent declines. Weakened faith in “Brand USA” – driven by trade tensions, rising fiscal deficits, and a loss of economic exceptionalism – is prompting a shift in global portfolios away from dollar-denominated assets. Moody’s recent downgrade of the U.S. credit rating has further fueled skepticism, with strategists warning of more depreciation to come. The dollar index has already fallen over 10% from its January highs, reflecting a broader move away from the currency by global investors.

A key factor driving this trend is the long-standing perception that the dollar has traded at inflated values. January levels were 22% above its 20-year average, and while it has since moderated, analysts argue there’s still significant room for a further 10% decline. This could bring the currency down to levels last seen during Donald Trump’s first term. As investors reassess the long-term outlook for the U.S. economy, previous confidence in American fiscal and policy stability is being replaced with caution.

Long-term concerns are rooted in the U.S.’s growing debt burden and political gridlock. Trump’s tax cuts are projected to add between $3 trillion and $5 trillion to the already massive $36.2 trillion national debt over the next decade. Analysts argue that the combination of high deficits and waning foreign interest in U.S. assets is eroding global confidence. Even though the Trump administration maintains a strong-dollar stance, market sentiment suggests otherwise as more investors expect prolonged weakness.

Despite these worries, foreign entities still hold vast amounts of U.S. equities and Treasuries accumulated over years of dollar strength. But recent events, like the dollar’s failure to act as a haven and rapid currency movements in Asia, are making investors reconsider their exposure. If doubts about the dollar’s role as a safe haven grow, this could trigger a broader reassessment and eventual selloff of U.S. assets, with significant consequences for global markets.

Lastly, the trend of unhedged dollar exposure is starting to reverse. As global institutions increase their hedge ratios to protect against currency risk, it translates to more selling pressure on the dollar. This is particularly significant for Asian economies, which hold over $2.5 trillion in dollar assets. While some investors remain cautiously optimistic about the U.S. economy’s resilience, the prevailing strategy now favors selling into dollar strength rather than betting on a sustained rebound.

Source: Reuters