The Long-Term Dollar Decline and Its Implications for Global Asset Allocation

The U.S. dollar's decline in 2025 has reached historic proportions, with the Dollar Index (DXY) plunging 10.8% in the first half of the year—the steepest drop since 1973. This trend is not a fleeting blip but a structural shift driven by fiscal recklessness, monetary policy divergences, and tectonic shifts in global economic power. For investors, understanding these dynamics is critical to rebalancing portfolios for the post-dollar-dominance era.

Drivers of the Dollar's Long-Term Decline

1. Fiscal Policies and Debt Burden
The U.S. fiscal deficit is a ticking time bomb. The Congressional Budget Office warns of an additional $21 trillion in deficits over the next decade, fueled by tax cuts and spending bills. This has pushed U.S. debt to unsustainable levels, raising term premiums on Treasuries. With foreign investors increasingly shunning dollar assets, the Treasury market's demand dynamics are fraying.

2. Monetary Policy Divergences
While the Fed is on hold, global central banks are acting aggressively. The ECB is poised to cut rates by 110 basis points by year-end, while Japan's BOJ may hike rates. This divergence has widened interest rate differentials, making dollar-denominated assets less attractive.

3. Global Decarbonization Shifts
The green energy transition is reshaping trade flows. A weaker dollar lowers the cost of dollar-denominated critical minerals (e.g., lithium, cobalt) for non-U.S. buyers, accelerating decarbonization in emerging markets. Meanwhile, U.S. policy rollbacks (e.g., the potential repeal of the Inflation Reduction Act) risk ceding leadership to China and Europe, further eroding the dollar's reserve status.

4. Emerging Markets' Resilience
Emerging economies with strong current accounts, like Sweden and Norway, are outperforming. Their fiscally prudent policies contrast sharply with U.S. profligacy, attracting capital flows. Even China's yuan, despite geopolitical headwinds, is gaining traction as a regional reserve currency.

Implications for Global Asset Allocation

The dollar's decline creates opportunities—and risks—for investors. Here's how to navigate them:

1. Commodities: A Hedge Against Dollar Weakness

A weaker greenback typically boosts commodity prices, as they are priced in dollars. Gold has already surged 1.79% weekly in July 螃 2025 due to its safe-haven appeal amid geopolitical tensions. Base metals like copper and nickel also benefit, though trade wars could disrupt supply chains.

Action:
- Long gold via GLD or physical holdings.
- Consider copper ETFs (e.g., COPX) or diversified commodity funds (DBC).

2. International Equities: Focus on Fiscal Prudence

European and Scandinavian markets, backed by stronger fiscal policies, offer better returns than U.S. stocks. The Euro Stoxx 50 and Nordic indices are poised to outperform as the euro and krona strengthen.

Action:
- Allocate to Europe via region-specific ETFs (e.g., IEV) or Nordic funds (EWD).

3. Currency-Hedged ETFs: Mitigate Dollar Risk

Currency-hedged ETFs (e.g., HEFA for Europe, FEZ for Japan) allow investors to capture equity gains without direct dollar exposure. Pair these with short-dollar ETFs (e.g., UDN) to amplify returns as the dollar weakens.

Risks to Monitor

• Fed Policy Shifts: A hawkish surprise could temporarily reverse the dollar's downtrend.
• Trade Wars: Escalating tariffs could disrupt commodity flows and inflation dynamics.
• Emerging Market Volatility: Geopolitical risks (e.g., Middle East conflicts) may cap gains in EM assets.

Conclusion: Position for a Multipolar World

The dollar's decline is a symptom of a broader realignment: the U.S. can no longer rely on its reserve currency status to paper over fiscal and structural weaknesses. Investors must diversify into non-dollar assets, commodities, and regions with sound fundamentals.

Final Advice:
- Underweight U.S. Treasuries and overallocate to high-quality EM bonds (e.g., PCY).
- Use futures or inverse ETFs (UDN) to bet on further dollar weakness.
- Stay agile: Monitor Fed minutes (July 10) and unemployment data (July 11) for turning points.

The era of dollar dominance is ending. Those who adapt will thrive in the new multipolar economy.