Skeptics and fatalists likely to be proven wrong again, as the U.S. dollar remains the “cleanest dirty shirt”
For decades, skeptics have warned that U.S. exceptionalism is fading and the “end of the dollar” is near. This narrative was amplified in the first half of 2025 as interest rates rose, the U.S. dollar fell, and foreign markets snapped into gear, outperforming domestic markets by over 13% through the end of April. The U.S. couldn’t be trusted, the story went, and international investors needed to pull their capital as the country turned into a banana republic.
Those same skeptics were validated in June as the dollar continued its worst start to a year since 1974, declining nearly 10% from the beginning of 2025. And as resilient economic data, improving sentiment, rising stock prices, and decreasing recession odds pushed interest rates higher into summer, many expected the U.S. Dollar to rebound as well. After all, exchange rates tend to follow interest rate differentials — higher yields attract flows from currencies with lower rates.
However, the U.S. Dollar didn’t follow suit – the link between interest rates and currency movements appeared to have broken. Did “Liberation Day” instill a vote of no confidence in the United States of America? Will capital flows out of the US continue to push yields higher and the dollar lower?
Chart Check: The Link Between Yields and the U.S. Dollar Appears to be Temporarily Broken
Our Take
We believe the crisis of confidence is unwarranted, and the typical correlation of rates and currencies is set to resume. While foreigners were selling U.S. assets in April, they have come back in force in May and June. Foreign investors bought a record net $326 billion in U.S. assets in May and followed it up with $192 billion in June. As the Fed embarks on a fresh easing cycle, the swing in sentiment around the magnitude and persistence of Fed easing represents a key dollar driver. Furthermore, zooming out provides much needed context. The decline is a cyclical move down from elevated levels, and despite the year-to-date decline, it remains well above the 20-year average.
A chart of the U.S. stock market compared to the rest of the world tells a similar story. After extreme outperformance around the election, the pullback early this year now looks more like a needed correction than a changed trend. US stocks have held the lead since mid-April.
The U.S. dollar remains not only dominant but also indispensable to the global financial system. Every prior “dollar bear market” sparked predictions of collapse. Yet after each downturn, the dollar reasserted itself as the anchor of the global financial system. This is because the fundamentals of U.S. exceptionalism—rule of law, deep capital markets, innovation, and military security—remain unmatched. Data shows that dollar usage is stable or increasing across the most important channels of global finance:
We believe the U.S. Dollar will remain irreplaceable. The U.S. Treasury market—over $27 trillion in size—is the deepest, most liquid pool of safe assets in the world and global investors still trust U.S. courts and institutions more than any alternative. Dollar dominance is also self-reinforcing: corporates borrow in dollars, central banks hold dollar reserves, and commodities are priced in dollars. Breaking these linkages would take decades, not years.
While China, Russia, and the Middle East talk de-dollarization, their financial systems remain closed, less transparent, and often politically manipulated. Reserve managers demand stability, not uncertainty. Finally, the U.S. continues to lead in technology (AI, biotech, clean energy, etc.) and attracts global capital inflows. Innovation drives productivity, which underpins long-term dollar demand.
The end of American exceptionalism is not dead—because it was never ending. The U.S. dollar will remain the world’s reserve currency, not by default, but by design.
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