A sharp decline in the U.S. dollar over the past few weeks has captivated Wall Street and inspired a wave of catastrophizing about the end of the dollar’s reign as the de facto global reserve currency.
But those tempted to write the epitaph of the global dollar might want to hold off, according to Steven Ricchiuto, an economist at Mizuho Securities.
“There will come a day when the global financial markets will be denominated in an asset other than the U.S. dollar, but that is [a] long way away,” Ricchiuto said in commentary shared with MarketWatch.
That doesn’t mean U.S. stocks and bonds won’t continue to struggle, at least in the near term. The ICE U.S. Dollar Index, a popular gauge of the dollar’s value against a basket of its rivals, was off by more than 1% on Monday, driving the index to its weakest level in three years.
An alarming sign
In the past, the buck has benefited when global markets have turned volatile — but not this time. Instead, the fact that the dollar has declined while Treasury yields have risen was enough to stoke speculation that the buck and U.S. bonds might be losing their “safe-haven” appeal.
And unless President Donald Trump walks back his tariff plans, some fear the greenback’s reserve status could be next on the chopping block.
On Monday, bitcoin prices were on track for their best session since Trump’s “liberation day” announcement on April 2, adding to speculation that investors were looking for new ways to protest the administration’s policy approach, according to Stephen Innes, managing partner at SPI Asset Management.
Still, Ricchiuto wasn’t the only one to push back against investors calling for the imminent end to the dollar’s role as the essential global currency.
Although the “sell American” trade has left Wall Street rattled, the shift away from U.S. markets has likely been more limited than the price action might suggest, said Will Compernolle, a macro strategist at FHN Financial, during an interview with MarketWatch.
“There’s been a premature declaration of the death of the dollar as the global reserve currency,” Compernolle said. “We’ve seen a flight away from U.S. assets at the margin, but there is no next obvious competitor.”
More room to run
This latest bout of weakness comes on the heels of a decade where U.S.-based assets trounced practically all of their main rivals.
Since the start of the COVID-19 pandemic, foreign investors have poured $9 trillion into U.S. equities, according to data from Apollo Global Management — and it’s not hard to see why.
During the aftermath of the pandemic, the U.S. economy grew much more quickly than its rivals.
However, a surge in policy uncertainty inspired by Trump’s tariff plans has likely put an end to this trade for now, as Jeffrey Schulze, head of strategy at ClearBridge Investments, pointed out in commentary shared with MarketWatch.
And there are reasons to suspect that the rotation away from the U.S. isn’t over yet. For example, European stocks are still looking cheap relative to their U.S. rivals according to most valuation metrics, Schulze noted, and American investors also remain underweight foreign stocks.
There’s no question that the dollar weakening alongside Treasury prices is a rare development that has, in the past, mostly occurred during times of crisis. Warren Pies, founder of 3Fourteen Research, highlighted all periods where the 10-year yield rose by 40 basis points or more, while the dollar weakened by 3% or more, in the chart below.
But this doesn’t mean that investors should jump to the worst-case interpretation this time around. There are other, less extreme explanations for the dollar’s recent weakness, Ricchiuto said. Trump’s approach to tariffs has left investors bracing for a recession later this year, which could be a more plausible explanation for the dollar’s weakness.
At the same time, expectations that the tariffs could stoke inflation might explain the selloff in bonds, along with the ongoing rally in gold that has brought the price of the yellow metal to a record high.
U.S. stocks slumped on Monday, with the Dow Jones Industrial Average falling 971 points, or 2.5%, to finish at 38,170.41, the S&P 500 dropping 2.4% and the Nasdaq Composite shedding 2.6%. The ICE dollar index was off by more than 1%, while the yield on the 10-year note rose by 7.8 basis points to 4.404% as of 3 p.m. Eastern time, according to Dow Jones Market Data.