Many analysts on Wall Street view the recent decline of the US dollar as a long-anticipated event, with shorting the dollar now seen as a popular global trade. Typically, foreign equities perform better than US stocks when the dollar is weaker, but the rise of AI trading may continue to drive demand for American assets. Betting against the notion of “American exceptionalism” has not been profitable for over a decade, but the significant drop in the dollar this year could change that trend.
Both Wall Street and the White House acknowledge that the decline of the greenback has been a long time coming. Leading up to 2025, the US currency had surged more than 50% from its lows during the Great Financial Crisis, with the strength of the dollar contributing to the success of US stocks. A weaker dollar now presents an opportunity for foreign equities to catch up, although the US remains a key player in the AI revolution, potentially allowing American assets to regain the lead.
President Donald Trump’s tumultuous tariff policies may have initiated a new chapter for the dollar. Recent data indicate a 10% decline in the dollar against a basket of currencies in the first half of the year, the steepest drop since 1986 following the Plaza Accord. Despite a slight recovery amidst global conflicts, investors have not fully recovered from the sell-off that began in April. This suggests that the trend of selling US assets may continue, according to Bill Sterling, a global strategist at GW&K Investment Management.
The ongoing impact of tariffs on the US economic outlook could make American assets less attractive to investors. While the dollar is unlikely to lose its status as the world’s reserve currency in the near future, it may face a decline in confidence. Foreign investment in US assets has supported the US deficit in recent years, but potential tax hikes on foreign capital could deter such investments, weakening the dollar further.
Many analysts believe that recent policy changes in Washington have triggered a necessary correction for an overvalued dollar. They point to the concept of purchasing power parity, which suggests that exchange rates should eventually allow the same amount of money to buy the same goods and services in any country. However, despite the theory’s relevance, the dollar was deemed 105% overvalued based on purchasing power last year, as per data from the International Monetary Fund.
The speaker emphasized the idea of lasting existence as he mentioned that the ball is now in motion. The latest survey by Bank of America’s fund managers revealed that shorting the U.S. dollar has become a popular trade worldwide, yet more than 60% of respondents believe the dollar is overvalued. Sterling commented on the momentum in currency markets, noting that established trends can reinforce themselves.
The question of whether AI can uphold ‘American exceptionalism’ arises. A prolonged decline in the dollar could have significant repercussions on global economies and American stock portfolios. Following the Global Financial Crisis, U.S. equities have significantly outperformed other markets, leading to increased foreign investment in American stocks.
However, a weakening dollar could prompt investors to diversify their portfolios, potentially impacting these trends. Trade tensions fueled by Trump’s policies are prompting countries to focus on boosting domestic demand, which can be beneficial for equity markets. Sterling drew a parallel with the Plaza Accord’s effect on Japanese markets in the 1980s, illustrating the potential impact of currency movements on export industries.
There have been talks within the Trump administration about a weaker dollar to enhance export competitiveness. While the possibility of a formal agreement like the “Mar-a-Lago Accord” may be unlikely, market forces seem to be driving currency devaluation independently. Despite uncertainty surrounding tariffs, many foreign stock markets have shown resilience and strong performance.
The potential weakening of the dollar comes with a caveat, as the growing optimism around AI trade could support American leadership in the long run. This could prevent a sharp decline in the dollar. Sterling suggested that U.S. exceptionalism might continue in the global economy, even though recent policy measures have shifted the country from a hyper to a slightly lesser exceptional status.
He cautioned that tech leadership does not always translate to superior equity returns, especially in times of a weaker dollar. Highlighting historical trends, he pointed out a period when the MSCI EAFE Index outperformed the S&P due to currency fluctuations.
The story was first showcased on Fortune.com.
