The Dollar's Decline: Navigating Geopolitical Shifts and Portfolio Rebalancing in 2025

The U.S. dollar, once the unchallenged cornerstone of global finance, is facing a seismic shift in its dominance. Geopolitical tensions, fiscal recklessness, and shifting trade dynamics are eroding confidence in the greenback, prompting investors to rethink their allocations. TS Lombard's analysis underscores a critical inflection point: the era of U.S. exceptionalism is over. Here's how investors should position for a post-dollar world.

Geopolitical Shifts Undermine Dollar Hegemony

The Trump administration's trade policies—most notably the April 2025 “Liberation Day” tariffs—have accelerated the dollar's decline. These measures, intended to narrow trade deficits, have instead sparked market anxiety, driving the DXY to a four-month low. TS Lombard's Dario Perkins notes that such policies risk overcorrecting by weakening U.S. import demand and spurring fiscal expansion in rival economies. Germany's abandonment of austerity, for instance, signals a shift toward self-reliance, while China's pivot to domestic stimulus further weakens U.S. trade leverage.

The geopolitical weaponization of the dollar—such as sanctions—has also backfired. Foreign governments, wary of overreliance on U.S. financial systems, are diversifying reserves. Japan's Ministry of Finance data reveals a 15% drop in foreign bond purchases between March and June 2025, signaling reduced appetite for U.S. Treasuries.

Macroeconomic Trends: Fiscal Recklessness and the "Summer of Anxiety"

Analysts at BofA Global Research warn of a “summer of anxiety” driven by tariff worries, recession risks, and doubts over U.S. fiscal sustainability. The U.S. budget deficit, already strained by years of tax cuts and stimulus, faces further pressure as trade tensions inflate import costs. Perkins' recession indicator—tracking payroll declines—suggests a “soft patch” rather than a full-blown crisis, but the administration's unpredictability has sown investor distrust.

Meanwhile, global rebalancing is underway. Europe's fiscal stimulus and China's domestic focus could reduce reliance on U.S. demand, narrowing trade deficits not through U.S. growth but via weaker domestic consumption. This structural shift, Perkins argues, will sustain dollar depreciation even if its reserve status remains intact.

Portfolio Reallocation: The "Short US/Long RoW" Strategy

Investors must pivot to capitalize on the dollar's decline and emerging market outperformance. TS Lombard's “Short US/Long RoW” (Rest of the World) thesis offers a clear path:

1. Overweight Non-Dollar Assets:
2. Emerging Market Equities: EM indices like the MSCI EM have outperformed the S&P 500 by 12% year-to-date, driven by China's stimulus and Latin American commodity exporters.
3. Non-U.S. Government Bonds: European and Asian bonds, offering higher real yields than U.S. Treasuries, are attractive havens.

4. Commodities: A weaker dollar boosts prices for oil, copper, and agricultural goods. Gold, a classic hedge against currency devaluation, could see renewed demand.

5. Underweight U.S. Exposure:

6. Reduce holdings in dollar-denominated debt and U.S. equities exposed to trade-sensitive sectors like manufacturing and retail.

7. Hedging Tools:

8. Use currency forwards or ETFs (e.g., UUP for dollar strength, UDN for weakness) to mitigate exchange rate risks.
9. Consider inverse ETFs or short positions in USD-linked assets.

Risks and Recession Feasibility

While a full fiscal crisis is unlikely, recession risks linger. Perkins highlights labor market fragility: a 0.5% monthly payroll decline could trigger a reflexive downturn. Investors should monitor initial jobless claims and Fed policy responses. A “soft patch” could pressure equities, but structural trends favor non-U.S. assets.

Conclusion: Embrace the New Normal

The dollar's decline is structural, not cyclical. Geopolitical shifts, eroding fiscal credibility, and capital reallocation have created a multi-polar financial landscape. Investors ignoring this trend risk obsolescence. By embracing non-dollar assets, hedging currency risks, and underweighting U.S. exposures, portfolios can thrive in a post-dollar world. As Perkins warns, “The era of U.S. exceptionalism is over”—and the sooner investors adjust, the better.