Macro & Strategy - July 2025

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Hail to the king

Section 1: The king is (not) dead

To truly understand the structure of the global financial and economic system, it helps to adopt a monetary lens. And when we do, we find that the U.S. dollar’s role as the global reserve currency explains many things.

Its centrality is difficult to overstate. Global trade is routinely conducted in U.S. dollars, even if neither trading party is American. Corporations and sovereigns alike issue debt denominated in the greenback. Central banks hold substantial dollar reserves. Key commodities (most notably oil) are priced and transacted in dollars. U.S. financial assets remain among the most liquid and desirable globally, attracting capital from every continent. And when the Federal Reserve changes its policy rates, the consequences reverberate well beyond U.S. borders.

This is the textbook definition of a global reserve currency. That the dollar achieved this status was no historical accident. It joined the elite ranks of the Spanish dollar, the Dutch guilder, and the British pound — currencies that served as global anchors in past centuries. In each case, the path to dominance was paved with military supremacy, economic leadership, financial innovation, and a measure of historical serendipity.

One king to rule them all

A unified reserve currency benefits the global economy. It enhances trade efficiency, reduces transaction costs, and provides a foundation for global capital flows. A multi-reserve-currency system would be inherently less efficient, potentially inviting constant speculation over which currency should dominate, and introducing instability into markets and price signals.

Highlights

• The U.S. dollar remains dominant, but global diversification into gold and other currencies and rising geopolitical suggest a slow, secular shift may be underway.
• Despite inflation and market stress, the US dollar is down ~10% YTD—marking a rare break from historical norms as a safe haven.
• We’re diversifying equity exposure toward Asia, Europe, and EMs, while staying overweight JPY and CAD, and underweight fixed income.

So why do global markets require a reserve currency? The answer is that it facilitates commerce and capital mobility by providing a common denominator — a highly liquid, widely accepted, and relatively stable medium of exchange and store of value.

Such a standard reduces frictions in trade, anchors expectations, and creates a natural convergence driven by network effects: The more a currency is used, the more indispensable it becomes.

Yet reserve regimes are not permanent. Even though they tend to be long-lasting — spanning multiple generations — they are not immutable.

The issuing country benefits handsomely from reserve status: lower borrowing costs, enhanced geopolitical leverage, and structural advantages in global trade and finance. These privileges, however, naturally draw challengers. The Anglo-Dutch Wars offer an early example: The British contested Dutch commercial dominance and ultimately installed the pound sterling as the world’s new reserve currency. In the modern context, China has made no secret of its ambitions to internationalize the yuan and reshape the monetary architecture within its regional sphere.

Equally important, reserve currencies can be undermined from within. Poor policy decisions, fiscal indiscipline, or political instability can erode confidence. Spain’s repeated defaults were instrumental in the fall of its dollar. The British pound lost its primacy in the aftermath of World War I, in part because of Britain’s indebtedness to the United States. As with empires, so too with currencies: Decline can be self-inflicted.

The United States still holds the commanding heights of global power. Its military might, economic scale, and highly developed financial markets support the dollar’s dominance. But if history is any guide, reserve-currency regimes typically endure for 100 to 150 years. Having been the reserve currency since the 1940s, the U.S. dollar may be entering the mature phase of its reign.

Moreover, amid growing concerns about U.S. fiscal sustainability, the unpredictability of its domestic politics, and the rise of China as a credible geopolitical and economic rival, it’s not unreasonable to ask: Is the long, slow decline of the dollar already under way?

Reports of the king’s death are greatly exaggerated

By virtually every metric, the U.S. dollar (USD) remains the world’s pre-eminent currency, with no credible challenger in sight. It features in nearly 90% of all foreign-exchange transactions—a dominance partly explained by the cost efficiency of routing trades through the USD (for example, CAD-USD and USD-EUR are typically cheaper than CAD-EUR directly). Meanwhile, the dollar’s share of global foreign-currency liabilities has held steady at about 70% for nearly a decade.

One area of erosion, however, can be seen in global foreign-exchange reserves. Although the USD still commands the largest share, it has been gradually losing ground—not only to gold (explored in the next section) but also to a growing array of smaller currencies, including the Chinese renminbi (yuan) and the Canadian dollar. 

The euro, often cited as the most viable alternative, remains a distant second. Its potential is hampered by persistent structural issues: limited political and fiscal integration among member states and a lack of economic dynamism. These factors significantly constrain its ability to serve as a global reserve currency.

China’s renminbi is frequently mentioned as a longterm contender, but its current role remains marginal, although it has been increasing. The opacity of China’s financial system, combined with deep-rooted structural challenges—such as demographic decline, a fragile real estate sector, and deflationary pressures—undermines its credibility as a global reserve asset.

In short, King Dollar still reigns supreme. Its central role in global trade, finance, and reserves suggests that any transition away from it will be gradual at best. Yet history reminds us that no hegemon lasts forever. The key question is whether we are witnessing the early stages of a slow decline.

The answer? A cautious “maybe.” If the dollar’s dominance is indeed beginning to erode, it will most likely be a long and measured process—evolution, not revolution. 

Section 2: Heavy is the crown

For more than seven decades, the U.S. dollar has reigned as the dominant global reserve currency. This role is backed by the sheer size of the U.S. economy, its technological leadership, its cultural reach, and a financial sector that remains the envy of the world. The U.S. also benefits from having the deepest, most liquid capital markets—a critical requirement for a reserve currency.

The perks of having the reserve currency include:

1. Cheaper borrowing costs — High demand for U.S. Treasury bonds keeps yields lower than they otherwise would be.
2. Persistent trade deficits without currency collapse — The dollar’s reserve role allows the U.S. to run external deficits with limited impact on currency stability.
3. Global leverage through sanctions — The U.S. can exert financial pressure on adversaries by controlling dollar-based transaction systems.
4. Emergency funding capacity — During crises, the U.S. retains access to capital markets, while other nations scramble for liquidity.

Estimates¹ suggest these benefits are worth about 0.5% of U.S. GDP a year, or $120 billion annually, with crisis premiums providing additional flexibility.

Yet this privilege comes with costs.

Chief among them is the persistent overvaluation of the dollar, which weakens U.S. manufacturing competitiveness. The structural trade deficits facilitated by dollar demand have hollowed out some sectors of the economy, fuelling political discontent. The outcome has been rising financialization and a declining focus on industrial investment.

Moreover, weaponization of the dollar via sanctions, financial surveillance, and transaction restrictions has generated a backlash. Countries wary of U.S. political influence have begun seeking alternatives. The Trump administration’s “America First” doctrine, with its aggressive trade posture and transactional diplomacy, has further accelerated this global reassessment.

At its core, the growing discontent with the U.S. dollar is not about spreadsheets or bond math. It’s about the geopolitical and economic asymmetries the current system perpetuates. And the desire to rebalance the playing field is growing.

The rotation from dollar to gold is under way

The key takeaway from the preceding section is clear: Monetary hegemony is not permanent. Over time, economic and geopolitical forces, often subtle at first, can profoundly reshape the global currency landscape.

Since the political realignment that began in the U.S. with the 2016 election of Donald Trump, a slow but perceptible shift has been under way. Although it would be premature to declare an imminent end to the dollar’s supremacy, the foundations of its dominance are no longer as unshakable as they once seemed. That said, we think it is highly unlikely that any single currency will displace the USD as the global reserve standard in the next few decades.

Still, even within a relatively short timeframe (10 years being brief in the context of the 100–150-year cycles typically associated with reserve-currency transitions), we are witnessing early signs of diversification.

Central banks, particularly those in politically nonaligned or sanction-exposed nations, have been reallocating reserves away from U.S. Treasuries to alternative stores of value, most notably gold.

This trend is not without context. Over several decades, the USD has increasingly been wielded as a tool of geopolitical influence—an extension, in many ways, of U.S. foreign policy and defence strategy. As a result, countries wary of potential sanctions or seeking greater autonomy have begun to reduce their exposure to dollar-denominated assets.

Recent data underscore this shift. Since 2017, the share of USD assets in global central bank reserves has declined steadily. When gold is included, the dollar’s share has fallen from 58% in 2017 to 44% in 2025. Even excluding gold, the decline is notable— from 65% to 58%—with the Chinese renminbi, the Canadian dollar and various minor currencies as the prime beneficiaries.

This trend raises a critical question: Are we witnessing a secular repricing of the dollar’s role to address the structural imbalances inherent in its reserve status? Or have we reached the inflection point historians will one day mark as the beginning of the end of the dollar era?

History rarely repeats but it often rhymes. A useful parallel can be drawn with the 1980s, when the dollar’s rapid appreciation led to global imbalances and ultimately the Plaza Accord of 1985—a coordinated effort by major economies to weaken the USD. Even though today’s context is different, the underlying theme is familiar: When a currency becomes too dominant, the world eventually pushes back.

Although historical parallels such as the Plaza Accord of 1985 offer valuable insights, today’s context is markedly different. Early in the 1980s, the U.S. dollar surged more than 50% in slightly more than four years, driven by a potent mix of tight monetary policy and expansive fiscal stimulus.

This combination attracted massive capital inflows, pushing the dollar to unsustainable highs and prompting coordinated international intervention.

The Plaza Accord, signed by the U.S., France, West Germany, Japan, and the U.K., successfully stabilized currency markets and rebalanced global growth. But it also marked a turning point for Japan. The yen appreciated by nearly 100% in two years, severely undermining Japan’s export-driven economy. In response, the Bank of Japan slashed interest rates, inadvertently fuelling a massive asset bubble. The subsequent collapse ushered in Japan’s Lost Decade, a prolonged period of stagnation that extended well into the 2000s.

This historical episode serves as a cautionary tale. Even though the U.S. may have legitimate concerns about the dollar’s strength, other major economies, particularly China, are acutely aware of the risks of forced currency appreciation. The Japanese experience remains a powerful deterrent.

Spotlight: The Plaza Accord – A Turning Point in Currency Diplomacy

What was the Plaza Accord?
The Plaza Accord, signed on September 22, 1985, was a landmark agreement between five major economies—the United States, Japan, West Germany, France, and the United Kingdom—to coordinate intervention in currency markets. The goal: to depreciate the U.S. dollar, which had climbed dramatically early in the 1980s, creating trade imbalances and economic strain, particularly for U.S. exporters.

Why was it needed?
By the mid-1980s, the U.S. dollar had appreciated by nearly 50% against the major currencies, driven by tight monetary policy and high interest rates under Fed Chair Paul Volcker. Even though its appreciation helped tame inflation, it also made U.S. exports expensive and imports cheap, contributing to a ballooning trade deficit and rising protectionist sentiment in Washington.

What did the Accord do?
The five nations agreed to intervene jointly in foreign exchange markets to weaken the dollar. This rare moment of coordinated global economic policy signalled to markets that the dollar’s strength was unsustainable and politically untenable.

What were the impacts?

• The dollar fell sharply—by about 40% against the Japanese yen and the German deutsche mark over the next two years.
• U.S. exports became more competitive, helping narrow the trade deficit.
• Japan, in particular, saw a surge in capital inflows and asset prices, contributing to the formation of its infamous late-1980s asset bubble.
• The Accord also set a precedent for multilateral currency coordination, although such efforts have remained rare and politically complex.

Why it matters today
The Plaza Accord remains a reference point in discussions about currency misalignments, global imbalances, and the limits of unilateral monetary policy in an interconnected world. As debates about the U.S. dollar’s role as a reserve currency continue, the Accord serves as a reminder of how geopolitics and macroeconomics can converge to reshape the global financial order.

Section 3: Trading the U.S. dollar

Beyond the structural and secular dynamics shaping the long-term trajectory of the U.S. dollar, investors must also consider how to position tactically in the months ahead. Our view: This may be a rare moment to bet against history—and play the long game.

The USD’s safe haven status: Is this time different?
Historically, the U.S. dollar has served as a reliable safe haven, appreciating during periods of market stress and economic downturns. During the past six U.S. recessions, the DXY index appreciated by an average of 3%, including a 13% surge during the 2007–2009 Global Financial Crisis, even though the crisis originated in the U.S. banking system.

More broadly, the USD tends to appreciate when U.S. inflation is falling and depreciate when it is rising. Its performance varies significantly across macroeconomic regimes.

A break from the pattern
Given the market stress experienced so far in 2025, alongside slowing growth and persistent inflation, historical precedent would suggest a stronger dollar. 

Yet the DXY has declined nearly 10% year to date. This divergence from historical norms is striking.

Moreover, economic theory suggests that import tariffs should support a currency by reducing trade deficits. Yet, despite the Trump administration’s renewed protectionist stance, the dollar has weakened.

Two short-term factors help explain this depreciation: 

1. Valuation and sentiment reversal: The USD entered 2025 richly valued, with U.S. growth optimism priced in and pessimism priced into other economies. As this narrative has begun to reverse, so too has the dollar’s momentum.
2. Repricing of U.S. exceptionalism: As discussed in our May 2025 piece, the perception of U.S. economic and institutional superiority is being reassessed, reducing the dollar’s relative appeal.

Beyond these cyclical drivers, the Trump administration’s trade and foreign-policy posture may be undermining the very foundations of dollar dominance. By weaponizing the USD through tariffs and sanctions, the U.S. risks accelerating the diversification of global reserves away from dollar assets.

We are typically cautious with the phrase “this time is different.” But, in this case, the evidence suggests a compelling case for a secular shift. The king is not dead, and no challenger is storming the gates—but the peasants are sharpening their pitchforks, and the court is too busy feasting to notice.

Positioning

We maintain our overweight position in equities. Despite persistent macro and trade policy uncertainty, as well as elevated geopolitical noise, the global earnings backdrop remains resilient. In the United States., S&P 500 earnings beat estimates by in Q1, with year-over-year earnings per share (EPS) growth of 12%. The breadth of earnings beats was stronger than usual. We think there is a good chance that this trend will continue in the short run. The AI investment cycle also continues to surprise to the upside, reinforcing the durability of large cap earnings momentum and allaying fears of a slowdown in AI-led investment.

As long as the US economy does not hit a significant speed bump because of tariffs, we believe that corporate earnings will remain resilient, supporting equities overall.

While we continue to see upside in equities broadly (including in the US and Canada), we are tilting away from North America toward Asia, Europe, and emerging markets. Stretched valuations, policy uncertainty, and a weakening US dollar are leading us to consider opportunities internationally. European equities are supported by a shift in fiscal policy (e.g. the end of Germany’s debt-brake rule for defence and infrastructure investments), investorfriendly reforms, and a surge in public and private investment.

Valuations remain reasonable with European equities trading at higher free cash flow yields and lower multiples than their US counterparts. Emerging market equities, including China, are also in a sweet spot. Inflation expectations are contained, monetary easing is underway across several EM central banks, and these countries have proven resilient to trade turbulence. China is showing signs of renewed momentum, with continued policy support since late 2024. The potential for a trade deal with the US has reduced headline risk.

We believe that EM equity flows will continue to be positive, and the gap between EM equity valuations and fundamentals is beginning to correct. In our view, this creates a compelling opportunity to increase exposure to EM and China within a globally diversified equity allocation.

We remain underweight fixed income, as the macro and policy backdrops continue to exert upward pressure on yields, particularly at the long end of the curve.

While bonds continue to offer diversification benefits and a potential hedge against equity volatility, we believe the risk-reward profile remains more challenged in the current environment. Fiscal dynamics in the US are a key concern. With the budget deficit projected to exceed 6% of GDP this year and widen further in 2026, the supply of government debt is set to remain elevated. This persistent issuance, combined with only partial offsets from spending cuts, is likely to keep term premia under pressure and challenge the notion of a durable bond rally in the absence of a meaningful slowdown in the US economy.

The high structural demand for capital—driven by both government and corporate financing needs— reinforces the upward pressures on yields. At the same time, central banks (and especially the Federal Reserve) appear in no rush to ease policy aggressively.

Despite softening sentiment indicators, hard data— particularly in labour markets and consumer spending—remains resilient. This divergence between soft and hard data has kept policymakers cautious, with the Fed and other central banks signalling a preference to wait for clearer signs of economic deterioration before committing to a more dovish stance. As such, the market’s rate cut hopes and expectations may again be disappointed in the near term. In this context, we prefer to stay underweight fixed income and maintain flexibility in our fixed income exposure. We continue to monitor developments closely, particularly around fiscal policy, inflation dynamics, and central bank communication. Should the data shift meaningfully toward weaker growth, or should financial conditions tighten abruptly, we stand ready to reassess our positioning.

In currencies, we maintain an overweight position in the Japanese yen, which we view as one of the most compelling opportunities in the currency space today. Several structural and cyclical factors are aligning in support of the yen. First, the likelihood of repatriation of foreign assets by Japanese investors is rising. With Japanese investors holding massive exposure in USD assets and offshore exposure now accounting for a large part of their portfolios, even a modest shift in currency allocation preferences could have a meaningful impact on currency flows.

Second, the back end of the Japanese yield curve has steepened materially, driven by expectations of further Bank of Japan normalization amid sustained inflation and wage growth.

This has made domestic Japanese assets more attractive on a relative basis, particularly as the appeal of US fixed income diminishes with rising fiscal risks and a weakening dollar. The combination of higher local yields and a reduced appetite for unhedged foreign bond purchases is likely to support a trend of yen appreciation. Moreover, the yen retains its safe-haven characteristics, particularly in an environment of elevated uncertainty.

We are also overweight the Canadian dollar. We do not think that upside in the Canadian dollar has been on investors’ radar recently, but it should be. While the imposition of tariffs by the United States has understandably raised concerns given Canada’s high trade concentration with its neighbour, we believe the consensus may be overestimating the potential damage to Canadian growth.

Canada’s macro fundamentals have weakened, but not precipitously so, and the currency stands to benefit from any upside surprises in domestic data or signs that the tariff impact is less severe than feared.

We also believe that the Canadian economy may outperform expectations in 2026 (after the point of maximum tariff uncertainty), as pent-up demand is released. If this view is correct, the Bank of Canada would have to shift its tone toward more hawkish language, and this would push the loonie higher. In this context, the Canadian dollar offers both cyclical upside and a degree of insulation from broader USD weakness.

¹ Matthew Canzoneri, Robert Cumby, and Behzad Diba, The Exorbitant Privilege and the Income from the U.S. Net Foreign Asset Position, NBER Working Paper No. 14242 (Cambridge, MA: National Bureau of Economic Research, 2008).