A Turning Point for the Dollar?
Wall Street’s confidence in the U.S. dollar is fading fast. After more than a decade of dominance, the greenback is experiencing its steepest first-half drop since 1986—down nearly 10% against a basket of major currencies, per Reuters. That decline is shaking up investment flows across the globe, spurring renewed interest in foreign equities as a viable alternative to American stocks.
This sharp move follows years of extraordinary strength. According to JPMorgan Private Bank, the dollar appreciated over 50% from its post-financial crisis lows through early 2025, a run that coincided with the U.S. stock market’s global outperformance. Now, the tide may be turning, with global strategists noting a decisive shift in sentiment.
Trade Policy and Tariff Fallout Fuel Uncertainty
Analysts point to a mix of macro forces weighing on the dollar. President Donald Trump’s aggressive tariff agenda has unsettled markets and may have catalyzed the greenback’s downturn. While the dollar briefly bounced on geopolitical tensions between Iran and the U.S.-Israel alliance, investors remain cautious. The sustained capital outflows since early April’s so-called “Liberation Day” underscore that bearish sentiment still dominates.
"In the scheme of things, there’s ample room for the dollar to decline further." — Bill Sterling, Global Strategist at GW&K Management
Sterling, formerly Merrill Lynch’s chief international economist, argues that rapid shifts in Washington—especially new policies that disincentivize foreign investment—are compounding the dollar’s retreat. Recent provisions in the GOP’s spending bill are set to raise taxes on foreign capital, despite America’s growing reliance on overseas inflows to finance its 7% deficit-to-GDP ratio.
Valuation Gaps and the Case for Decline
From a fundamentals standpoint, Sterling and others point to a historic misalignment between the dollar’s value and its purchasing power. IMF data show the greenback was overvalued by 105% last year, exceeding peaks from 1985 and 2002. Purchasing power parity—a concept highlighting how exchange rates should equalize buying power across countries—has diverged sharply from reality.
While practical limitations often dilute its predictive power, the magnitude of the current imbalance may be unsustainable.
"And once a trend gets established, it can sometimes feed on itself." — Bill Sterling, GW&K Management
According to Bank of America’s monthly fund manager survey, shorting the dollar is now among the most crowded global trades. More than 60% of respondents still view the greenback as overvalued.
Implications for Global Markets and U.S. Investors
The ramifications extend far beyond currency markets. With 18% of the U.S. equity market held by foreign investors, a weakening dollar could reverse long-standing inflows into American assets. Conversely, U.S.-based investors could benefit when allocating abroad—as a falling dollar amplifies returns on foreign holdings.
Trade policy is also nudging countries like China and Germany to stimulate domestic demand, often a boon for local equity markets. Sterling cites Japan’s experience post-Plaza Accord in the 1980s, when a stronger yen initially hit exporters but ultimately boosted equities thanks to aggressive rate cuts.
"The Japanese stock market was one of the strongest in the world in the second half of the [1980s]." — Bill Sterling, GW&K Management
Within Trump’s orbit, voices like Vice President JD Vance and economic advisor Stephen Miran have floated the idea of deliberately weakening the dollar to improve trade competitiveness. Miran even raised the possibility of a “Mar-a-Lago Accord,” though few see such coordination as likely.
Regardless, market forces may be pushing the dollar lower on their own. Asian and Latin American indices have surged—Hong Kong’s Hang Seng is up over 20% year-to-date, while the S&P Latin America 40 has posted similar gains, dwarfing the S&P 500’s modest 3% advance.
Can AI Sustain America’s Market Edge?
Despite the headwinds, the U.S. remains the undisputed leader in AI. Many on Wall Street argue that continued innovation in artificial intelligence could underpin American asset strength, limiting how far the dollar can fall. As long as the world needs exposure to U.S. tech, demand for dollars will persist.
"Maybe U.S. exceptionalism is still the main story in the global economy for the next five years." — Bill Sterling, GW&K Management
Still, past periods of technological leadership haven’t always guaranteed superior returns—particularly in weak-dollar environments. Between 2002 and 2011, for example, the MSCI EAFE index nearly doubled in value, while the S&P 500 gained just over 40%.
The dollar may be weakening, but the contest between global rebalancing and U.S. innovation is far from settled. Investors should prepare for a more nuanced world—where American exceptionalism exists, but no longer goes unchallenged.
Source: Fortune, June 24, 2025.
