The dollar's slow fade

Every few years someone declares the end of the dollar, and every few years they are wrong. The reserve currency is sticky for reasons that have nothing to do with sentiment: invoicing, debt denomination, and the sheer depth of the Treasury market. None of that has broken. So let me be precise about the claim I am making — it is not that the dollar collapses. It is that the marginal buyer is changing, and marginal flows are what move prices.

What the reserve data actually shows

The dollar's share of allocated reserves has drifted from roughly 66% a decade ago to under 58% today. That drift is slow — a percentage point or so a year — but it is remarkably steady, and it has not gone into the euro. It has gone into gold and a scattering of smaller currencies. When central banks diversify at the margin, they are not making a trade; they are changing a policy. Policy changes don't reverse on a risk-off day.

The more interesting signal is real yields. A weakening currency alongside positive real rates is unusual — it usually means the market is pricing something the yield curve hasn't caught up to yet. In this case, I think it's a term-premium story: investors want more compensation to hold long-dated dollar assets, and they're expressing it through the currency because the Treasury market is being backstopped.

The dollar isn't being sold. It's being under-bought — and at the margin, that's the same trade.

Where this shows up in a portfolio

For a dollar-based investor, the cleanest expression isn't shorting the dollar — it's owning the assets that a fading dollar quietly re-rates. International value has lagged for a decade partly on currency; some of that reverses. Gold is the obvious beneficiary and I've held it since Issue No. 129. And unhedged foreign equity exposure, which most US investors under-own, becomes a tailwind rather than a drag.