The Dollar's Long Shadow: Re-Engaging with Global Bond Funds in a Shifting Era

The U.S. dollar, long the bedrock of global finance, is now at a crossroads. After a 15-year bull run that saw the Dollar Index (DXY) rise by 40%, it has entered a bear market, down nearly 11% in the first half of 2025—the worst half-year performance since the 1973 oil crisis. This decline is not a fleeting correction but a symptom of deeper structural shifts: slowing U.S. growth, widening fiscal deficits, and a global rebalancing of capital. For investors, the question is no longer whether the dollar will weaken, but how to position portfolios in a world where its primacy is increasingly contested.

The Dollar's Decline: A Structural Shift

The U.S. economy, once a beacon of resilience, is now showing cracks. Growth is projected to fall from 2.7% in 2024 to 1.5% in 2025 and 1% in 2026, as the Trump-era tariffs—initially hailed as a boost to manufacturing—begin to erode productivity and business investment. These policies, coupled with a $4.2 trillion trade deficit (4.2% of GDP), have created a perfect storm for the dollar. Meanwhile, the Federal Reserve's tightening cycle has stalled, with markets pricing in only 44 basis points of cuts in 2025, far behind the 110 basis points expected from the ECB and 47 basis points from the Bank of Japan. This divergence in monetary policy is accelerating the dollar's relative decline.

The implications for global bond markets are profound. Non-U.S. sovereign and corporate bonds have outperformed Treasuries by a wide margin, with international bonds returning 4.8% year-to-date in 2025 compared to 4.2% for U.S. debt. Investors are increasingly hedging their U.S. dollar exposure through forwards and options, a trend that could lead to $3.3 trillion in dollar selling over the next five years. This shift is not merely tactical—it reflects a growing skepticism about the U.S. fiscal model, epitomized by the “Big Beautiful Bill” tax plan, which threatens to add $1.7 trillion to the deficit by 2034.

The Case for Re-Engagement

For years, global bond funds have been dismissed as a “sleeping giant” in the shadow of the dollar's dominance. But the current environment offers a compelling case to re-engage with this asset class. First, the dollar's weakness is creating a tailwind for non-U.S. bonds. A weaker dollar enhances the returns of foreign-currency bonds when converted back to U.S. dollars, effectively providing a double benefit from both yield and currency appreciation. For example, Japanese 30-year JGBs have surged to a 20-year high of 3.0%, while Scandinavian and Australian bonds offer yields of 5–11% in dollar terms—rates that U.S. Treasuries can no longer match.

Second, the structural challenges facing the U.S. economy are creating a vacuum in the global safe-haven market. Central banks, particularly in China, are diversifying reserves into gold and other currencies, while investors are fleeing Treasuries in droves. In April 2025 alone, U.S. bond funds saw $15.64 billion in outflows—the largest in over 27 months. This exodus has left U.S. bonds trading at stretched valuations, with 10-year yields at 4.4% despite weak growth and inflation risks. By contrast, international bonds offer better risk-adjusted returns, particularly in markets with stronger fiscal discipline and rising growth.

Strategic Considerations for Investors

Re-engaging with global bond funds requires a nuanced approach. Here are three key strategies:

1. Diversify Across Currencies and Regions: Focus on markets with strong fiscal fundamentals, such as the eurozone (with its robust household balance sheets and EU stimulus programs) and emerging markets with improving credit profiles (e.g., India, Brazil). Avoid overexposure to high-yield sectors in the U.S., which are vulnerable to a recession.

2. Hedge Currency Risk Prudently: While dollar weakness is beneficial, sudden reversals can occur. Use currency forwards or options to lock in gains, particularly in volatile markets like emerging economies.

3. Leverage the Yield Premium: The gap between U.S. and non-U.S. bond yields is at a 30-year high. Investors should prioritize long-duration bonds in countries with credible fiscal frameworks, such as Canada, Australia, and Norway, where yields are supported by structural growth.

The Road Ahead

The dollar's decline is not a sudden collapse but a gradual erosion of confidence. Central banks, investors, and policymakers are all recalibrating to a new reality where the U.S. currency is no longer the sole anchor of global finance. For investors, this presents an opportunity to rebalance portfolios toward a more diversified, yield-focused approach. Global bond funds, once overshadowed by the dollar's dominance, are now emerging as a critical component of a resilient investment strategy.

In this shifting landscape, the question is no longer whether to re-engage with global bonds—but how to do so with the discipline and foresight required to navigate a world where the dollar's reign is waning. The time to act is now, before the market fully prices in the dollar's long-term weakness and the opportunities it creates.