After fourteen years of almost uninterrupted strength, all signs indicate that the US dollar has entered a new phase. The foundations that have sustained its dominant role in the global financial system are cracking, and several experts agree that the bullish trend that characterised it since the global financial crisis has come to an end.

In early 2025, the dollar peaked (in terms of real effective exchange rates) at its highest level since 1985. This appreciation has been supported by a series of structural and cyclical factors that had made the dollar a globally desirable asset:

• Robust growth cycle in the US, outperforming the eurozone and Japan.
  
  One of the keys to the United States' economic leadership in the post-global financial crisis period was its energy independence, fuelled by the rise of fracking. This structural change reduced the country's vulnerability to global supply crises, as evidenced during the war in Ukraine, when Europe suffered severe energy tensions while the US remained stable.
  
  
•  Advantage in real returns (IRRs), with a Federal Reserve (Fed) that has kept rates high.
  
  The Federal Reserve's (Fed) monetary policy was another key pillar supporting the strength of the dollar. At a time when many advanced economies were forced to resort to negative interest rates (as in the eurozone and Japan), the Fed was able to keep rates higher than other countries thanks to the strength of domestic economic activity.
  
  This difference in real returns between US bonds and those of other G7 countries led to an influx of international capital into dollar-denominated assets, further increasing demand.
  
  
• Leadership in technology, with innovative companies including those in the AI sector.
  
  The United States has also played a central role as a cradle of technological innovation. Leading positions in areas such as artificial intelligence, cloud computing and digital services have enabled companies such as Apple, Microsoft and Nvidia — all listed in dollars — to become global benchmarks. This generated large flows of foreign capital into US financial markets, strengthening demand for dollar-denominated assets and, therefore, for the currency itself.
  
  
• Institutional trust thanks to a stable political and monetary structure.
  
  The significance of US demand for global trade meant that governments around the world, in particular those in emerging countries, needed to accumulate dollars to facilitate trade flows in the event of crises or periods of volatility. This is how the dollar became the world's reserve currency.

All of this created a virtuous circle: growth, investment in dollar-denominated assets, demand for the currency and, therefore, further appreciation of the dollar.

Euro/dollar exchange rate over time

Sources: European Central Bank

The dawn of change

After years of dominance, the dollar is beginning to show signs of structural weakness. The first indication is a loss of relative momentum. The growth differential between the United States and other powers such as China and Germany has narrowed, as these countries are stimulating domestic demand and redirecting some of their capital towards local markets, reducing their dependence on the United States.

Meanwhile, the new US trade policy, marked by the use of tariffs to reduce imports and boost manufacturing, may have counterproductive knock-on effects. In the short term, falling imports may limit consumption and slow growth, thereby affecting confidence in dollar-denominated assets.

Furthermore, institutional and fiscal risks are emerging. The rapid increase in public debt, pressure on the Federal Reserve and the potential use of debt as a geopolitical instrument could erode the credibility of the system. All of this calls into question the perception of the dollar as a safe haven and points to a change in cycle, in which the currency's weakness could become structural rather than temporary.

Finally, the geographical diversification of investors, which until now has been highly concentrated in the US, is changing. Capital flows are shifting to other regions, weakening structural demand for dollars. This financial delocalisation is increasingly contributing to the trend of sustained depreciation of the US currency.

Conclusion

Against this changing backdrop for the dollar, investors will need to meticulously assess their currency positions, particularly given the significant exposure to the dollar of global equity indices, which has increased in recent years. Reducing dollar exposure by incorporating exchange rate hedges could help mitigate some of the risk in this environment.