The US dollar isn’t doomed. Rather it is undergoing a cyclical pullback after a prolonged bull market, driven by temporary factors like the slowing economy, fiscal tightening and Fed easing (debt ceiling constraints), and political uncertainty. Despite recent weakness, the dollar’s safe-haven status remains intact, as evidenced by resilient demand for US Treasuries (i.e. stable or lower relative term premia). With Fed Liquidity expected to tighten in late-2025 and no erosion in the dollar’s structural role, this dip is a correction, not a collapse. Media fears are overblown: the US dollar’s global dominance is secure for the foreseeable future.
With hindsight, the mention of the word ‘Accord’ (viz Mar-a-Lago), like the previous Plaza (1985), Louvre (1987) and Shanghai (2016) Accords should have flagged that upcoming large currency moves were likely. Nonetheless, the hysteria about the End of the Dollar is completely wrong, because the US unit is too embedded in the international financial architecture and there are few viable alternative units. Yet, these fears are also understandable after such a long bull market and the worrying debt trends in the US.
Perspective is always important and the chart below, which focuses on the most robust measure of the US unit, shows movements in the real trade-weighted basket since the mid-1960s. It is plain that a long bull market started shortly after the 2008/09 GFC. This was underpinned, both by structural inflows of capital seeking regulatory approved ‘safe assets’, as well as one-off moves of flight capital, following China mid-decade anti-corruption crackdown, and cyclical inflows encouraged by America’s strong relative GDP growth.
The chart poses two key questions: first, is the 2009-25 bull market set to end? And, second, is a cyclical pull-back from the top to the bottom of the trend channel likely?
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