A Still-Slippery Slope

The US dollar has long been perceived as a “safe haven” asset during periods of discord; true to form, the greenback has rallied since the onset of war in Iran. Making a structural case in favor of the dollar is more challenging, however.

Though the dollar has fallen 10% since the start of 2025 after a long period of strength, we’re open to the possibility that we may be in only the early stages of a weak-dollar period once geopolitical conditions normalize. The dollar remains about 15% above its long run average, and there are a number of dynamics that suggest continued reversion to the mean is possible.¹

On the policy side, cuts to the federal funds rate have compressed interest-rate differentials and pressured the dollar. At the same time, a US fiscal deficit that is historically outsized relative to unemployment and for which political will to consolidate is lacking may promote structurally higher inflation and debasement of the currency.²

Meanwhile, dollar support from foreign investment in the US may wane as rich US equity market valuations, US overweights in foreigners’ portfolios, and increasing US-centric risk encourage repatriation or smaller investment flows into the US. At the same time, lower interest rate differentials make hedging US dollar risk cheaper, potentially encouraging more hedging and weighing on the dollar. These same factors may prompt domestic US investors to increase foreign allocations in pursuit of more attractive opportunities in markets abroad. Notably, international markets historically have tended to outperform during periods of dollar weakness; to wit, the MSCI World ex USA Index returned 32.6% in 2025 compared to the 17.9% gain of the S&P 500 Index.³

Geopolitical tensions and the potential for financial weaponization have also called into question international reliance on the dollar. For example, freezing Russia’s access to dollar-denominated reserves following its invasion of Ukraine in 2022 appeared to trigger a shift in central banks’ appetites toward more politically neutral assets. Having averaged around 470 tonnes per year from 2010 to 2021, central bank gold purchases averaged more than 1,000 tonnes per year from 2022 to 2025, and gold holdings now exceed Treasuries as a share of foreign reserves for the first time in 30 years.⁴