USD: The Big Transition

Our DM ex. US and GeoMacro strategists argue the dollar remains dominant but no longer holds a monopoly on reserve functions. The global monetary order is transitioning away from dollar dominance toward a regime with multiple reserve anchors. The dollar’s three core roles (international settlement, store of value, and global funding) are beginning to diverge, with each shifting toward other currencies at a different pace. No single currency fills the gap; our colleagues expect reserve managers to construct synthetic baskets that implicitly replicate those functions. 

As central bank reserve flows fragment, the US can no longer count on price-insensitive foreign buyers to suppress term premia; European fixed income stands to benefit. US equity valuations face a structural headwind as dollar seigniorage erodes, while European equities face the opposite dynamic as capital market integration deepens. 

The decline of dollar funding dominance will shift cross-asset correlations, and most portfolios remain under-diversified for the new emerging regime. Our colleagues see real assets, gold, and commodity-linked currencies as structural winners, drawing demand from multiple directions as reserve managers and FX allocators seek alternatives to the dollar's traditional functions.