Dominance of the U.S. dollar is gradually weakening, caution investors
Worries increases as the clout of the greenback takes a hit
There's a growing sense of unease among investors as the Almighty Dollar, the world's de facto currency, struggles to regain its lost glory following Trump's trade war that dented confidence in US assets.
The DXY index, which measures the greenback's strength against a basket of global currencies, has experienced a 6.5% drop since the start of the year, marking its worst performance since June 2002 across a two-month period. Meanwhile, the S&P 500 has bounced back from the damage wrought by 'Liberation Day,' recording a 0.3% increase in the past month, while US Treasury yields have cooled off from their peak, with the 10-year yield dropping from 4.5% to 4.3%, approaching pre-tariff levels.
Deutsche Bank economist Peter Sidorov pointed out the greenback's "laggard" performance compared to other indicators of US financial health. Despite the dollar recovering slightly against the euro and yen over the last week, it's still slipping against Asian currencies, with the Taiwanese Dollar soaring by 6.5% over the weekend, and China's yuan reaching its highest level in nearly six months at 7.2 per dollar. The South Korean Won also posted a substantial 3% surge on Friday.
Nigel Green, CEO of Devere Group, articulated his belief that this weak trend isn't merely a temporary hiccup but the start of a gradual and far-reaching shift that will slowly erode the dollar's supremacy. He cautioned that the dollar's uncontested dominance is waning, though the currency's demise won't happen overnight. In Green's view, the global economic landscape will gradually transform into a more fragmented system as a diverse array of major currencies assumes greater influence.
Central banks have started to loosen their reliance on the dollar as it now accounts for less than 59% of global reserves, a significant drop from more than 70% at the turn of the century. Analysts at Allianz Global Investors anticipate the dollar's value will continue to depreciate due to concerns over Trump's volatile policies and potential meddling with the Federal Reserve, which poses a risk to monetary policy credibility and the overall confidence in US assets.
While the market seems to have recovered from the fear of trade tariffs rocking the nation, it still appears wary of a broader geopolitical shift away from the US. Furthermore, there's a growing discomfort with the idea of the dollar serving as a political tool, as some observers foresee a more multifaceted system of major currencies taking the lead.
In summary, the greenback faces cyclical challenges due to policy uncertainties and valuation pressures, but its structural role in the global financial system remains significant. Yet, analysts argue that the inevitable erosion of the dollar's dominance is a long-term process that may see a slow but steady shift in the landscape of international currency markets.
Investors show concern as the US dollar's strength against global currencies, measured by the DXY index, exhibits a significant drop. This decline, not seen since June 2002, has occurred since the start of the year. Deutsche Bank economist Peter Sidorov notes the dollar's "laggard" performance compared to other indicators of US financial health. Meanwhile, the S&P 500 has bounced back, but the 10-year US Treasury yield has cooled off, approaching pre-tariff levels. Nigel Green, CEO of Devere Group, predicts this weak trend could be the start of a gradual shift away from the dollar's supremacy, with a more fragmented global economic landscape emerging. Central banks are now relying less on the dollar, contributing to concerns about its prolonged depreciation due to Trump's volatile policies and potential interference with the Federal Reserve. The market, despite recovering from trade tariff fears, remains wary of a broader geopolitical shift away from the US and the growing discomfort with the possibility of the dollar being used as a political tool.
