The Greenback's Vulnerable Status
The dominance of the US dollar in global finance is gradually weakening, according to financial experts' cautions.
Investors sound the alarm over the alleged weakening of the mighty US dollar, as it limps back into contention after Trump's trade war dealt a crushing blow to investor confidence in American assets.
The DXY index, used to gauge the buck's performance compared to a group of foreign currencies, has taken a 6.5% hit since the calendar ticked over to January, marking its worst two-month plunge since June 2002.
However, the S&P 500, having recovered from the scars inflicted during 'Liberation Day', stands tall with a 0.3% growth in the last month. Similarly, yields on US Treasury bonds have adjusted downwards, with the 10-year yield dropping from a peak of 4.5% to a more agreeable 4.3%, not far from pre-tariff levels.
Deutsche Bank economist Peter Sidorov referred to the dollar as a "sagging underachiever" that has struggled to catch up with the surge from other indicators signaling US financial health. Even as the dollar has regained some ground against the euro and yen over the past week, it has continued to slide against Asian currencies, most notably the Taiwanese dollar, which surged 6.5% over the weekend.
China's yuan struck a six-month high against the US dollar, while the South Korean Won leaped almost 3% on a single Friday. Economist Nigel Green of Devere Group predicts that the dollar's epoch of universal power is fading, stating, "Dollar dominance isn't vanishing overnight, but its days of unassailable dominance are dwindling. This downfall isn't catastrophic — it's erosion."
According to Green, markets may have recouped from fears that tariffs could wreak havoc on the US economy, but the persistent feeling that a strategic detachment from the US is essential remains. Green adds that there's growing unease with the notion of the dollar being wielded as a political weapon, signaling the emergence of a "more fragmented system" as diverse currencies take on greater influence.
Central banks around the globe have started unwinding their dependency on the dollar, as the almighty buck accounts for a mere 59% of global reserves, down from a staggering 70% at the beginning of the millennium. Michael Krautzberger, the global CIO of fixed income at Allianz Global Investors, speculates that the dollar's worth will persist falling due to Trump's tumultuous policies that threaten to undermine the dollar's "exorbitant privilege" and interest in US assets.
Krautzberger advises preferring to maintain a restricted US dollar presence in portfolios, forecasting ongoing headwinds for the buck through 2025.
- The economy's reliance on the US dollar has begun to wane as central banks around the world are shifting away from their dependency on it.
- The persistent feeling that strategic detachment from the US is essential remains in the business world, with investors becoming increasingly uneasy about the use of the dollar as a political weapon.
- Nigel Green of Devere Group predicts that the dollar's epoch of universal power is fading, with diverse currencies taking on greater influence and leading to a more fragmented system.
- Michael Krautzberger, the global CIO of fixed income at Allianz Global Investors, anticipates the dollar's worth continuing to decline due to Trump's tumultuous policies that threaten to undermine its "exorbitant privilege" and interest in US assets.
- As the US dollar limps back into contention after the trade war, some investors may choose to limit its presence in their portfolios, considering ongoing headwinds for the currency through 2025.
