Dollar Weakness: Temporary Pullback or Structural Shift?

The Case for Structural Weakness

The US fiscal deficit at 6% of GDP, combined with eroding confidence in US institutional stability, has triggered a gradual diversification away from dollar reserves. Central banks reduced dollar holdings from 59% to 54% of reserves over the past three years.

This doesn't mean the dollar collapses — there's no alternative reserve currency. But it does mean the dollar's equilibrium level is lower than the market assumed, and the adjustment is ongoing.

Portfolio Implications

A weaker dollar is bullish for: international equities (in dollar terms), commodities, EM local currency debt, and gold. It's a headwind for: US large-cap earnings (translation effects) and domestic bonds (foreign buyers demand higher yields).