Dollar's 10% Drop Sparks Global Sell America Trade

The U.S. dollar’s decline has been a topic of significant interest among financial analysts and investors. Many believe that the greenback’s drop has been long overdue, and shorting the dollar has become one of the most popular trades globally. This trend is driven by the perception that foreign equities tend to outperform U.S. stocks when the dollar is weaker. However, the burgeoning AI industry in the U.S. could potentially reverse this trend, maintaining demand for American assets.

Over the past decade, betting against “American exceptionalism” has not been profitable. The dollar’s significant drop this year might change that dynamic. The greenback had appreciated more than 50% from its lows during the Great Financial Crisis, which helped U.S. stocks become highly attractive to global investors. Now, a weaker greenback is giving foreign equities a chance to catch up. However, with the U.S. being the primary hub of the AI revolution, U.S. assets could still lead the market.

President Donald Trump’s tariff policies may have ushered in a new era for the dollar. Earlier this year, the dollar was down 10% against the basket of currencies in the DXY index, marking the steepest loss for the greenback in the first half of the year since 1986. Despite a slight recovery amid geopolitical tensions, investors have not made up for the exodus since early April, suggesting that the “Sell America” trade still has momentum.

Bill Sterling, a global strategist, believes there is ample room for the dollar to decline further. If tariffs continue to weigh on America’s growth outlook, U.S. assets may become less appealing. While the dollar may not be replaced as the world’s reserve currency anytime soon, it may no longer command the same level of confidence. Over the last few decades, foreigners have funded America’s exploding deficit by purchasing U.S. assets. However, recent policy shifts in Washington, including tax hikes on foreign capital, could discourage capital inflows and weaken the dollar.

Sterling points to purchasing power parity, which suggests that exchange rates should allow a given amount of money to purchase the same amount of goods and services in any country. The dollar was significantly overvalued on a purchasing power basis last year, and this imbalance cannot exist forever. According to a recent survey, shorting the U.S. dollar has become one of the world’s most popular trades, but over 60% of respondents still believe the greenback is overvalued. Once a trend gets established in currency markets, it can sometimes feed on itself.

If the dollar’s decline persists, it will have major implications for global economies and Americans’ stock portfolios. Since the Global Financial Crisis, U.S. equities have far outperformed the rest of the world. However, dollar weakness could push investors to allocate more money elsewhere, potentially reversing these trends. When Americans purchase foreign stocks and see the greenback decline, their returns can get a significant boost. Meanwhile, trade tensions are forcing both developed and emerging economies to focus on stimulating domestic demand, which equity markets tend to reward.

Sterling acknowledges that the AI trade could be a significant caveat to his argument about a weakening dollar. There is optimism about the AI industry, which many believe is still in its early stages. American leadership in this space is unlikely to disappear anytime soon, regardless of U.S. trade and economic policy. This means investors will need plenty of dollars, preventing the greenback from falling precipitously. While tech leadership hasn’t always guaranteed superior equity returns, especially when the dollar is relatively weak, it could still sustain “American exceptionalism” in the global economy for the next few years.