Economy & Markets
Mar 7, 2025
Is this the downfall of the U.S. dollar?
Key takeaways:
- Since the early 2010s, U.S. stocks have consistently outperformed, Treasuries have seen steady demand, and the dollar has risen. In turn, many global investors have built up substantial overweights in U.S. assets.
- Now, for the first time in years, U.S. stocks, bonds and the dollar have sold off together—a rare signal that investor confidence in U.S. market leadership is shifting.
- The dollar’s longstanding overvaluation is beginning to unwind, which could result in a 10%–20% decline against major peers such as the euro and Japanese yen over the medium term. We don’t see this as a breakdown in the dollar, but it is a reset.
- We don’t think investors need to overhaul their asset allocations, and the United States remains a valuable core holding. But recent market action reminds us that over-reliance on any single market carries risks. In a shifting environment, intentional diversification across regions and currencies is crucial.
U.S. assets have been at the epicenter of global market volatility year-to-date.
In a rare and striking shift, U.S. stocks, bonds and the dollar have all declined in tandem. This trifecta of weakness isn’t just unusual—it signals a meaningful shift in sentiment.
The driver? A sharp rise in U.S. policy uncertainty has shaken investor confidence in U.S. assets and even sparked debate about the U.S. dollar’s role as the world’s primary reserve currency.
Here we examine the pillars of U.S. exceptionalism, consider how they might be shifting, and discuss how the shifts might impact your own investment decision-making.
U.S. exceptionalism: Is the tide turning?
For decades, U.S. exceptionalism has been a cornerstone of global investing, powered by robust economic growth, tech dominance, high real (inflation-adjusted) yields and deep markets. Since the early 2010s, U.S. stocks have consistently outperformed, Treasuries have attracted steady demand, and the dollar has risen almost uninterruptedly. In turn, many global investors have built up sizeable allocations to U.S. assets. These capital inflows have more than offset large U.S. trade deficits—underscoring the supremacy of “King Dollar” and pushing it to stretched valuations by many measures.
The U.S. has financed its trade balance with investment from abroad
$ bn, 1-year rolling
Sources: Exante Data, China Flow Analytics, CFETS, Thomson Retuers. Data as of December 31, 2024.
The tide may be turning. For the first time in years, the dollar looks to be unwinding its longstanding overvaluation, which could mean a 10%–20% decline over the medium term against major peers such as the euro and Japanese yen. Our two preferred long-term valuation models—the dollar’s real effective exchange rate versus long-term averages, and one based on purchasing power party—both point to a similar magnitude.
J.P. Morgan Asset Management’s 2025 Long-Term Capital Market Assumptions estimate EUR/USD rising to 1.29 and USD/JPY falling to 114 over a 10-15 year investment horizon. Our base case is that the dollar loses a few more percentage points by the end of this year against major peers, but the risk is that medium-term weakness will occur more swiftly.
The dollar remains overvalued on long-term valuation metrics
U.S. real effective exchange rate deviation from historical averages, %
Sources: Bloomberg Finance L.P., J.P. Morgan Asset Management – Long Term Capital Market Assumptions 2025. Data as of April 24, 2025.
A dollar reset matters
The dollar influences every aspect of investment strategy—from the economic outlook to return expectations, to valuations, earnings models and, more directly, currency risk.
A weaker dollar can make imports and dollar-priced commodities more expensive, potentially fueling inflation and complicating Federal Reserve (Fed) policy. At the same time, it boosts overseas revenues for U.S. multinationals1—unless tariffs or supply chain issues squeeze profit margins. Either way, the dollar’s direction carries consequences.
For global investors, this calls for a reset. U.S. assets have been the default destination for over a decade, with the dollar as a reliable anchor. In turn, foreign ownership of U.S. assets has climbed to $26 trillion.2
As a result, even small shifts in portfolio allocations or hedging decisions can create big waves. For example, over the last few years, we’ve seen foreign investors cut back on currency-hedging their U.S. equity exposures. Euro-based funds currently FX-hedge only 50% of their U.S. stock holdings, down from a long-term average of 67%.3 Indicatively, with $16 trillion in foreign-held U.S. stocks,4 just a 1% change in hedging could lead to over $160 billion in U.S. dollar selling.
Momentum seems to be heading in that direction. Foreign investors were still pouring an average of about $7 billion per week into U.S. stocks through early March. But in the past two months, those flows have collapsed to zero, with two of those weeks registering the biggest weekly outflows on record. At the same time, European stocks are seeing renewed attention, with inflows in seven of the last 10 weeks rivaling the strongest months over the last two years.5
Bottom line: We don’t think investors need to overhaul their asset allocations, and the United States remains a valuable core holding. But high uncertainty and the potential for a weaker dollar mean ignoring geographic imbalances carries a greater risk than it once did. In a shifting environment, purposeful portfolio positioning, including international assets and gold, is crucial.
Why now? Evaluating the pillars of the dollar’s strength
Heading into 2025, the dollar had appreciated over 50% from its Global Financial Crisis (GFC) lows—one of the longest periods of dollar strength since the 1970s.6 To gauge the potential for a new dollar regime, we can first examine the interconnected pillars that have upheld the dollar’s strength. Each is facing its own stress test.
Here’s our assessment, ranked from most to least under threat.
On the verge of a new dollar cycle
U.S. Dollar (DXY) Index, Red = weak USD cycle, Green = strong USD cycle
Sources: J.P. Morgan Wealth Management, Bloomberg Finance L.P. Data as of April 24, 2025.
1. Better growth and higher yields
The U.S. economy has consistently outperformed its developed market peers, particularly during the post-GFC and post-COVID recoveries. This growth edge was paired with higher yields, buoyed by a Fed that raised rates earlier and more aggressively in 2022–23. Together, that attracted capital to U.S. stocks and bonds.
This year has started on a more somber note. Tariffs are expected to hit the U.S. economy harder than the rest of the world, prompting Wall Street economists to raise their recession probability forecasts from roughly 20% to 45%.7 Meanwhile, the Fed is moving toward rate cuts alongside other central banks, narrowing the yield differential that has supported dollar strength.
On balance: This pillar is weakening. A dampening U.S. growth premium and shrinking yield advantage make the United States look relatively less attractive to foreign capital.
2. Confidence, especially when it counted
That said, the dollar has weakened more than interest rate differentials alone would suggest—a sign that sentiment and flows are playing significant roles in the current environment. The U.S. Dollar Index is currently 5% discounted relative to its yield-implied fair value.
The dollar’s recent decline hasn’t been driven by relative yields
5-year government bond yield differential, % vs U.S. Dollar Index Level
Sources: J.P. Morgan Wealth Management, Bloomberg Finance L.P. Data as of April 24, 2025. Yield differential is DXY-weighted.
For years, the dollar has enjoyed a unique duality: It climbed in both risk-off environments (as a safe haven) and risk-on rallies (driven by U.S. growth leadership). Thus investors consistently favored the U.S. across market cycles.
That confidence made one dynamic especially rare: the dollar falling alongside U.S. stocks and bonds. This is typically a sign of capital fleeing a country as an overall destination. Historically, that constellation of price action has happened just 6% of the time for the United States, compared to over 30% for emerging markets such as Brazil.8
The dollar has not exhibited its usual safe haven status in 2025
Average returns based upon monthly returns since 1970, %
Sources: J.P. Morgan Wealth Management, Bloomberg Finance L.P. Data as of April 24, 2025.
But in a break from the pattern, it’s happened repeatedly this year. The dollar has declined on the same days that U.S. stocks and bonds have sold off, signaling that the “confidence premium” in U.S. assets has been in question. For Euro-based investors in unhedged U.S. stocks, the impact has been acute: An investment linked to the S&P 500 would be down roughly 16% compared to “just” about 8% for U.S. investors,9 a meaningful divergence from prior drawdowns, and renewed incentive for foreign investors to revisit currency-hedging for overall asset allocations.
On balance: U.S. assets still command respect, but confidence doesn’t seem as automatic.
3. Tech and innovation dominance
The United States has led the AI boom, hosting over 75% of globally listed large- and mid-cap tech companies.10 The Magnificent 7 have been key players, now making up about 30% of the S&P 500’s market cap and over 10% of the global stock market.11 We don’t think that dynamism for the U.S. economy is in question.
Yet, China’s DeepSeek AI model revealed earlier this year served as a challenge to U.S. dominance. In addition, major U.S. tech firms face antitrust risks, and innovation hubs in Japan, India and elsewhere are gaining appeal.
On balance: This pillar remains strong, but it’s slightly vulnerable.
4. Political and institutional stability
Stable institutions, an independent central bank and a trusted legal framework underpin the dollar’s role as the cornerstone of the global financial system. Even amid political gridlock and polarization, global investors have relied on America’s consistency and institutional continuity.
Some argue that trust is now being tested. Recent policy shifts have brought real political volatility, from tariff threats to public challenges against the Fed. Even before this year, the increasing use of financial sanctions and dollar-based enforcement tools began to erode the perception of the U.S. dollar as neutral ground. In 2022, Russia’s foreign exchange reserves were frozen, and in early 2025, a single tweet threatened sanctions on Colombia’s dollar assets. The message: Dollar access may not be guaranteed, and U.S. security guarantees may come with conditions.
At the same time, the U.S. fiscal picture continues to deteriorate. Deficits are widening, interest costs are rising, and there’s little political consensus on restoring stability. However, we continue to see consistent demand at U.S. Treasury auctions, suggesting these issues are a less acute driver of recent dollar moves.
A functional government is important to investors
Average credit default swap (CDS) spread vs. average “functioning of government” score
Source: Bloomberg Finance L.P., Freedom House as of April 2025. *Based on crtieria: 1. Do the freely elected head of government and national legislative representatives determine the policies of the government? 2. Are safeguards against official corruption strong and effective? 3. Does the government operate with openness and transparency?
On balance: This pillar remains solid, but it’s becoming shakier as political risk grows more structural than episodic.
5. No other alternative
The dollar has dominated global financial market activity partly because it’s been the only real option. No currency rivals its global role in reserves, trade settlement or financial infrastructure. It accounts for about 90% of FX transactions, 66% of international debt, 58% of foreign exchange reserves and 48% of SWIFT transactions.
U.S. dollar is still dominant in global trade and finance
Percentage of currency use by purpose, %
Sources: BIS, IMF, Society for Worldwide Interbank Financial Telecommunication (SWIFT) and ECB calculations. Data as of December 31, 2022. Notes: the latest data for foreign exchange reserves, international debt and international loans are for the fourth quarter of 2022. SWIFT data are for December 2022. Foreign exchange turnover data are as of April 2022. *Since transactions in foreign exchange markets always involve two currencies, shares add up to 200%.
The euro, the closest competitor, lags the dollar by over 50% in FX transactions.12 While digital finance could narrow the dollar’s lead, alternative currencies have been more volatile this year. Initiatives such as the BIS’s Project mBridge, exploring alternative central bank payment systems, could eventually challenge the dollar’s dominance, but they’re still in early stages.
On balance: This pillar remains strong, with only slight fraying at the edges.
What can you do about it?
How you diversify across currencies depends on your home base and your risk appetite.
We continue to see U.S. assets as critical, core allocations to portfolios. But some pivot back toward more globally diversified portfolios may play out in the year ahead. One straightforward approach to position for this potential scenario: shift some of your investments into international markets that aren’t denominated in U.S. dollars, focusing on deep and liquid markets such as Europe and Japan. This can help reduce currency risk and further diversify sources of return in your portfolio.
Another option is a currency overlay strategy. This involves making specific currency trades against the dollar, investing in alternatives such as the euro, Japanese yen and gold to spread out your currency exposure. Using FX forward contracts may be a cost-effective way to do this, offering flexibility and allowing you to tailor your strategy to your financial goals.
If you’re outside the United States, consider hedging strategies to shield your investments from dollar fluctuations. Forward contracts can help you hedge your exposure back to your home currency while maintaining your current investments. For those with managed portfolios, investing in hedged share classes can also help manage currency risk without altering your overall investment strategy.
Please reach out to your J.P. Morgan advisor to explore one—or a combination—of these strategies tailored to your personal needs and financial goals.
1According to the Bureau of Economic Analysis, over 50% of U.S. multinational enterprises’ sales are sourced by foreign affiliates. Data as of 2022 per report dated November 15, 2024.
2U.S. Federal Reserve. June 30, 2024.
3Cheema-Fox, Alex, and Robin Greenwood. “How do Global Portfolio Investors Hedge Currency Risk?” October 2024.
4U.S. Federal Reserve. June 30, 2024.
5EPFR Data. April 18, 2025.
6Bloomberg Finance L.P., J.P. Morgan Wealth Management. April 24, 2025.
7Wall Street Journal Survey of Economists. April 2025.
8Bloomberg Finance L.P. April 18, 2025. Measured as the 3-year rolling percentage of weeks that have seen a market’s stocks, bonds and currency down.
9Bloomberg Finance L.P. Represents total return as of April 23, 2025.
10Bloomberg Finance L.P. Globally listed technology companies proxied by information technology sector companies in the MSCI ACWI Index. April 23, 2025.
11Bloomberg Finance L.P. April 23, 2025.
12Bank for International Settlements (BIS) Triennial Central Bank Survey. April 2022.
INDEX DEFINITIONS
- The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. The ICE US computes this by using the rates supplied by some 500 banks.
- The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
KEY RISKS
A sharp rise in U.S. policy uncertainty has caused investors to reassess their considerable overweights to U.S. assets. It has also sparked debate about the U.S. dollar's role as the world's primary reserve currency. How might these changes impact your own investment decision-making?
Samuel Zief
Global Macro Strategist & Head of Global FX Strategy
Madison Faller
Global Investment Strategist
Harry Downie
Global Investment Strategist
Published Apr 25, 2025
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