Is the dominance of the U.S. dollar entering a new era of uncertainty? According to Allianz Trade, yes — but the greenback should not be written off just yet. The recent weakening of the dollar has been driven primarily by economic-cycle factors, particularly differences in monetary policy across the Atlantic, rather than political pressures or de-dollarization campaigns. While the dollar still has no real rivals in terms of yield and market depth (liquidity), its outlook is clouded by multiple layers of risk.
Economic factors outweigh politics
This year’s weakness of the U.S. dollar has largely been the result of short-term interest rate differentials rather than politically driven factors. Despite the strong global narrative about de-dollarization, it was not the main driver behind the dollar’s depreciation. The weakening of the EUR/USD exchange rate since the start of the year has mainly reflected markets pricing in a more dovish stance from the Federal Reserve compared to the hawkish European Central Bank (ECB) — a result of slower U.S. economic momentum rather than doubts about the Fed’s independence.
Long-term U.S. inflation expectations remain anchored, while short-term price pressures have eased faster than anticipated. According to Allianz Trade analysts, roughly two-thirds of the dollar’s depreciation this year stems from cyclical (economic) factors, while the remaining one-third is linked to de-dollarization pressures that intensified after the so-called “Liberation Day” — primarily through increased demand for currency hedging, not through a direct outflow of capital. Importantly, the U.S. continues to attract strong foreign investment inflows.
De-dollarization: gradual, not disruptive
Although de-dollarization remains a popular geopolitical topic, Allianz Trade notes that the process is mild and gradual. For now, the pressure manifests mainly as a rise in demand for currency-hedging instruments, rather than a massive withdrawal of capital from dollar-denominated assets.
Foreign holdings of U.S. equities remain particularly high — especially in technology and semiconductor sectors — reflecting continued investor confidence in the dollar. Nonetheless, politics has added a new element of uncertainty. Concerns about the Fed’s independence have grown, and policy divergences among FOMC members have somewhat weakened market sentiment, even though long-term inflation expectations remain stable. Any shift in those expectations would be an early warning signal of eroding investor trust.
Interest rate divergence drives short-term weakness
This year’s decline in the dollar has been strongly tied to interest rate expectations. Lower-than-expected inflation in the U.S., coupled with a cooling labor market, has led investors to anticipate more rate cuts by the Fed than initially projected earlier in the year. Meanwhile, the ECB has maintained a more hawkish stance, widening the transatlantic policy gap.
This divergence has weighed on the dollar, but Allianz Trade estimates that two-thirds of its depreciation is attributable to these cyclical factors, not political or structural shifts. The remaining one-third can be associated with de-dollarization dynamics — a gradual diversification away from the U.S. currency as both a reserve and settlement currency.
Outlook: a stable dollar around EUR/USD 1.18
Allianz Trade expects the EUR/USD exchange rate to remain broadly stable around 1.18 in the medium term. While de-dollarization is likely to continue, it is expected to unfold gradually rather than disruptively.
Some of the current hedging activity could eventually lead to a slight reduction in foreign investor exposure to the dollar, but the lack of credible alternatives — both in terms of returns and market liquidity — should limit the scale of this shift.
Furthermore, Allianz Trade forecasts fewer Fed rate cuts than markets are currently pricing in, which could sustain a favorable interest rate differential for the dollar and help offset the mild de-dollarization effect.
Political risk and future uncertainty
Uncertainty remains high, and much depends on future U.S. political developments. The dollar’s outlook, according to Allianz Trade, is fragile — or rather, uncertain. Global confidence in the dollar could be undermined by several unpredictable factors:
- A more accommodative Fed stance in response to a potential economic slowdown;
- Persistent doubts over the Fed’s independence;
- Or a possible return to “Mar-a-Lago-style” interventions, such as implicit expropriation or “revenge taxes” on foreign capital gains.
While none of these risks are immediate, Allianz Trade warns that any direct political interference in monetary policy could accelerate de-dollarization beyond what current economic fundamentals would justify.
In conclusion: The dominance of the U.S. dollar may indeed be entering a more uncertain phase, as the economic cycle intertwines more closely with politics. Yet, according to Allianz Trade, this is more of a market correction than a structural collapse. The greenback continues to benefit from deep markets, high liquidity, and investor confidence — and, for now, it remains without a true global alternative.
Source: CEO.com.pl – “Czy dominacja dolara wkracza w nową erę niepewności? To raczej korekta niż załamanie”
