The Hindu: Published on 21nd May 2025:
Why in News?
The U.S. dollar is under growing pressure and weakening in global markets due to multiple structural and sentiment-related factors. Despite a brief recovery, the dollar has lost over 10% since January 2025. The fall is being driven by:
Moody’s credit rating downgrade of the U.S.
Concerns about ballooning fiscal debt and trade imbalances.
Declining global confidence in the idea of enduring U.S. economic supremacy ("Brand USA").
Shifting investor sentiment towards diversifying away from dollar-denominated assets.
Background:
For over a decade, the U.S. dollar was supported by strong economic performance, foreign investments, and its role as a global reserve currency.
The Trump administration’s aggressive tariffs and recent fiscal policies have triggered uncertainty.
Despite multiple red flags over valuation, the dollar maintained strength—until now.
Moody’s recent downgrade of U.S. sovereign credit added a significant blow to its reputation.
Key Issues:
Overvaluation:
Dollar still trades ~10% above its 20-year average despite a sharp recent decline.
Investors view this as unsustainable without underlying support.
Portfolio Rebalancing:
Global investors are increasingly moving assets out of the U.S., reducing demand for the dollar.
Hedging Pressure:
Rising FX hedge ratios among institutional investors are pushing more dollar selling in forward markets.
Safe-Haven Reputation Diminished:
Dollar's failure to act as a traditional safe-haven in recent volatility has shocked many investors.
Massive Fiscal Deficits:
U.S. debt is expected to increase by $3-5 trillion due to unfunded tax cuts and structural spending.
Geopolitical and Trade Factors:
Trade uncertainties, especially with China, have discouraged foreign capital inflows.
Impact:
On U.S. Economy:
A weaker dollar may boost U.S. exports but will also make imports and foreign debt servicing costlier.
It could trigger inflationary pressures if the decline accelerates.
On Global Markets:
Rebalancing of foreign holdings (especially from Asia) could destabilize currency markets.
Countries like Taiwan and South Korea, with large USD reserves, may influence future currency trends.
On Investors:
Portfolio shifts may continue toward euro, yen, or gold as safe-haven alternatives.
Investors are now viewing dollar rallies as selling opportunities rather than buying chances.
Expert Opinions:
George Vessey (Convera):
There’s plenty of room for further dollar depreciation from a valuation perspective.
Steve Englander (Standard Chartered):
The truce in trade wars hasn’t resolved the long-term confidence issues.
George Saravelos (Deutsche Bank):
The rigid U.S. fiscal setup and diminished interest in U.S. assets is unnerving markets.
Stephen Jen (Eurizon SLJ):
$2.5 trillion in USD reserves in Asia could become a sharp downside risk.
Jack McIntyre (Brandywine Global):
Rather than expecting a rebound, look for opportunities to sell the dollar on strength.
6. Future Outlook:
- Unless the U.S. economy surprises with strong performance, the dollar could decline further.
- Upcoming fiscal policy decisions and geopolitical developments will play a decisive role.
- Central banks and sovereign investors may gradually reduce dollar reserves, accelerating the slide.
- The dollar’s long-term position as the dominant reserve currency may be challenged if confidence doesn’t return.
