The DXY in Retreat — Anatomy of a Three-Year Depreciation

The US dollar reached its historical peak in September 2022, when the DXY index — measuring the dollar against a basket of six major currencies — topped out at 114.8. Since then, the erosion has been slow but inexorable. On this 21st of August 2026, as the Jackson Hole symposium opens, the DXY trades around 97.4 — a loss of 17 points in under four years, and nearly 9% since January 1, 2026 alone.

This trajectory is far from trivial. It reflects a combination of cyclical and structural factors that, taken together, fundamentally alter the return equation for any investor holding dollar-denominated assets without currency hedging. The EUR/USD pair, which was flirting with parity in 2022, now trades around 1.14 — a move of more than 14 cents that represents a substantial exchange-rate loss for European portfolios exposed to US markets.

The depreciation is not uniform. Against the Japanese yen, the dollar has lost 18% since its 2024 peak, as the Bank of Japan gradually normalised its policy. Against the euro, the move is more moderate but consistent, reflecting the diverging fiscal dynamics between the two zones. Against high-yielding emerging market currencies (Brazilian real, Indian rupee, Mexican peso), the greenback is also ceding ground — a signal that the global risk re-rating cycle is underway.

Three Structural Drivers of Dollar Weakness

The dollar’s depreciation is not the result of chance or a simple seasonal rotation. It is driven by three deep forces that, individually, would each have been sufficient to weigh on the greenback — but which are now converging simultaneously for the first time since the 1970s.

The US Fiscal Drift

The Congressional Budget Office estimated that the “Big Beautiful Bill” would add approximately $3.3 trillion to the deficit over ten years, pushing federal debt toward 130% of GDP by 2030. This level, once reserved for economies in distress, is beginning to affect the risk premium demanded on Treasuries — and by extension, confidence in the dollar as a reserve currency.

The bond market has reacted: the 30-year Treasury yield crossed the 5% threshold in June 2026, before retreating to around 4.75% in August. Foreign demand at auctions, long solid, is showing signs of attrition: the bid-to-cover ratio at 10-year auctions fell below 2.4 on several occasions in Q2 — a warning signal.

The Gradual De-dollarisation of Global Reserves

The dollar’s share of global foreign exchange reserves, per IMF COFER data, fell to 57.4% in Q1 2026 — versus 65.5% in 2010 and 71% in 2000. This slow, secular decline accelerated after the freezing of Russian reserves in 2022, which prompted many emerging market central banks to re-examine the concentration of their holdings in US assets.

China has reduced its US Treasury holdings from $1,316 billion in 2013 to approximately $760 billion in August 2026. Japan, the world’s largest holder at nearly $1,100 billion, is maintaining its positions but has reduced net purchases. Gold and emerging market currencies (renminbi, rupee, dirham) are progressively filling the gap.

The Fed Pivot and the End of Rate Differential

The third driver is monetary. For two years (2022–2024), the dollar benefited from a favourable rate differential: the Fed was hiking aggressively while other central banks lagged. This global carry trade inflated demand for dollars. That regime is now behind us. Kevin Warsh, speaking at Jackson Hole today, is expected to confirm the Fed’s pause — but the market now prices 50 to 75 basis points of cuts by end-2027, eroding the dollar’s yield advantage versus the euro and yen.

Asset Class Impact — Who Wins, Who Loses

A weaker dollar is not neutral for portfolios. It redefines relative returns across all asset classes, favouring those that benefit from increased global demand or from monetary erosion hedges, while penalising European investors exposed to the US without currency protection.

Analysis of historical episodes of dollar weakness (1985–1990, 2002–2007, 2017–2018) reveals robust patterns. Gold, priced in dollars, mechanically appreciates when the dollar depreciates. Emerging market equities, whose revenues are often in local currencies but whose debt is dollar-denominated, benefit from an easing debt burden. Commodities, priced in dollars on global markets, become cheaper in foreign currencies — stimulating demand.

For the European investor specifically, the situation is doubly sensitive. A European portfolio holding US equities without hedging suffers a double negative effect when the dollar falls: equity prices may rise in dollar terms, but euro appreciation erodes euro-denominated returns. Over the first nine months of 2026, the S&P 500 posted approximately +8% in dollars, but barely +0.5% for an unhedged European investor — after EUR/USD currency effect.

This is one reason why flows have been exiting unhedged US equity funds in Europe since the start of the year, shifting toward EUR-hedged funds, European equities, and real assets.

Repositioning Your Portfolio — Recommended Adjustments

Adapting to this environment involves three strategic axes: hedging currency risk on existing US positions, reinforcing asset classes that benefit from dollar weakness, and incorporating assets denominated in alternative currencies (euro, yen, Swiss franc, selective emerging market currencies).

The Duration Question for Bonds

Dollar weakness generally accompanies falling US yields — which favours long-duration dollar bonds for dollar investors. For an unhedged European investor, the equation is less attractive: price appreciation gains are partially or fully erased by dollar weakness. Better, therefore, to favour high-quality European bonds (Bunds, OATs, EUR IG credit) that benefit from the ECB easing cycle without currency risk.

Recommended duration on EUR bonds is 4 to 6 years: long enough to capture the rate decline anticipated by the ECB (following the German recession analysed in our August 14 article), without excessive exposure to an inflation reversal.

What Could Reverse the Trend — Risks to Watch

An honest analysis must identify scenarios in which dollar weakness could reverse. Three catalysts could trigger a sharp DXY rebound over the coming quarters.

A US inflationary shock. If US CPI rebounded above 3.5% — driven by tariff pass-through, an oil spike or a second-round wage effect — the Fed would be forced to maintain higher rates for longer, or even hike again. The rate differential would again favour the dollar. Estimated probability: 20%.

A European debt crisis. An OAT/Bund spread above 120 basis points, or a renewed Franco-Italian debt crisis, would restore safe-haven appeal to the dollar. Global investors would return to Treasuries in a typical systemic European stress scenario. Estimated probability: 15%.

A sharp global recession. In the event of a brutal shock — major geopolitical escalation, credit accident, banking panic — the dollar would reclaim its safe-haven status, as in March 2020. Dollar liquidity remains unmatched for global institutional investors in periods of stress. Estimated probability: 15%.

Outside these adverse scenarios, the base context supports continued moderate dollar depreciation over the next 12 to 18 months. The DXY could test the 93–95 range by mid-2027 if the Fed cuts twice and the US deficit continues to widen.