US dollar supremacy is slowly eroding, investors warn
Investors are warning that the supremacy of the US dollar is slowly eroding, as the currency struggles to regain its position after Trump’s trade war shook confidence in US assets.
The DXY index, which tracks the greenback’s performance against a basket of currencies, is down 6.5 per cent since the start of the year, and has had its worst two-month performance since June 2002.
At the same time, however, S&P 500 has recovered entirely from the damage inflicted on ‘Liberation Day’, and is up 0.3 per cent in the last month. Similarly, US Treasury yields have climbed down from their elevated position, with 10-year yields coming down from 4.5 per cent to 4.3 per cent, close to pre-tariff levels.
Deutsche Bank economist Peter Sidorov described the dollar as a “notable laggard” that had failed to keep up with the surge from other measures of US financial health.
While the dollar has recovered slightly against the euro and yen over the last week, it has continued to fall against other Asian currencies, with the Taiwanese dollar surging 6.5 per cent over the weekend.
Meanwhile, China’s yuan hit its highest in almost six months at 7.2 per dollar, and the South Korean Won jumped almost three per cent on Friday.
“We don’t believe this is a short-term wobble. It’s the opening phase of a steady but far-reaching shift,” said Nigel Green, chief executive of Devere Group.
“Dollar supremacy isn’t vanishing overnight, but its era of unquestioned dominance is fading. This decline is not a crash – it’s erosion.”
Green explained that while markets may have recovered from fears that tariffs could wreak havoc on the US economy, they still seemed to believe that a strategic shift away from the US was necessary.
“There’s growing discomfort with the idea of the dollar being used as a political instrument,” he added, stating he expected a “more fragmented system” as a broader mosaic of major currencies take on more influence.
Central banks around the world have been gradually unwinding their reliance on the dollar, as it now accounts for just under 59 per cent of global reserves, down from more than 70 per cent at the start of the century.
Michael Krautzberger, global CIO of fixed income at Allianz Global Investors, said he expected the dollar’s value to continue falling, as Trump’s volatile policies and desire to meddle in the leadership of the Federal Reserve risked “eroding monetary policy credibility and confidence in US assets”.
“We also think that the US dollar will face ongoing headwinds through 2025, so we prefer to have a short US dollar footprint in portfolios,” he added.