The great uncoupling: Is this the end of dollar domination?

Is the era of US exceptionalism over? We often hear this term in reference to the exceptional performance of US stocks, particularly in the tech sector.

However, over recent decades the US has also benefited from an exceptional status within bond and currency markets. Both its government bonds (Treasuries) and its currency (the dollar) have offered a safe haven for investors in times of uncertainty. The Treasury market is deep and liquid, while the dollar makes up circa 60% of global reserves. This status has been underpinned by the US’s reputation as a beacon of stability and credibility. As a result, in times of crisis, typically Treasury yields come down, while the US dollar strengthens.

Now, this correlation has been broken, with the dollar sinking to its lowest level in three years in June, while the 30-year Treasury yield has been hovering close to the 5% mark, since the end of May.

2025 marks only the third time this has occurred over the last 30 years, with the other periods including 2009 in the aftermath of the Global Financial Crisis which subsequently saw a prolonged period of dollar underperformance. 

“In times of crisis, typically Treasury yields come down, while the US dollar strengthens.”

The end of dollar domination?

This has been sparked by a combination of factors, including uncertainty over the trajectory of the US economy as a result of Trump’s tariff policy. There is a belief that the US will enter a slowdown, if not a recession given it is difficult for companies to operate on a basis of uncertainty. A recessionary scenario would increase expectations of Federal Reserve interest rate cuts which would generally result in a weaker dollar. Furthermore, there are pervasive fears that the US deficit is burgeoning to unsustainable levels, driven by the “big, beautiful tax bill” currently making its way through Congress.

While the sliding of the dollar has sparked some alarm, during his presidential campaign, Donald Trump identified a weaker dollar as a key objective. Seeking to drive a resurgence in US manufacturing, a cheaper dollar would make US exports more attractive, while simultaneously easing the US’s reliance on cheap imports. In turn, this would benefit Trump’s agenda of reviving the US manufacturing industry.

What does this mean for investors?

While this decoupling marks a significant shift from the norm, the US dollar and Treasury market remain the most liquid in the world, something that is unlikely to change without a dramatic event. If the erosion of US exceptionalism is occurring, it will likely be a multi-year process. However, the decoupling of the relationship between yields and currency is usually a feature of many emerging market countries and signifies the misgivings of many investors who may be sensing cracks emerging in the previously unshakable foundations of the US.

“The US dollar and Treasury market remain the most liquid in the world.”

Investors may begin to look elsewhere, with other regions offering alternatives. Europe possesses a deep, liquid pool of debt.  However, for the euro to gain traction as a safe haven asset would require further debt mutualisation, where member states of the European Union (EU) pool their sovereign debt obligations. This has begun to occur, for example, through a coordinated financial response to the COVID-19 pandemic. This trend could accelerate further with the requirement of significant defence spending, strengthening the euro’s reserve currency role.

Meanwhile, despite the volatility in the wake of Trump’s tariffs, emerging market currencies have performed well, with local currency bonds one of the best performing asset classes in the fixed income space year-to-date, supported by a positive growth and inflation story. 

Given these dynamics, investors will likely look to diversify, with the euro being a true contender, in our opinion, although any significant change will likely take years. 

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.