Dollar sell-off is Hedge America, not Sell America

The incessant selling of the US dollar from December into this year has many investors scratching their heads and searching for an underlying motif. Foreign exchange valuations are derived from a host of economic metrics that ebb and flow, but the most recent dollar rout appeared to materialize out of the ether. Lacking a substantive explanation, market participants were quick to turn to a tired old standby: “Sell America.”

To recap, the US dollar forfeited -8.10% in 2025 and posted cash (spot) losses against all Group of 10 (G10) peers. However in September, it found a technical foothold and even climbed back up to recover slightly against a host of developed- and emerging-market currencies. Naturally, investors dared to dream that the downtrend had concluded. Not so. After only a two-month respite, the dollar sell-off resumed facing nothing but downward pressure since. So what happened?

In autumn, the Federal Reserve was getting less dovish and the fiscal stimulus set out in the One Big Beautiful Bill lay just over the horizon. To many, it seemed logical that dollar weakness had ended. But momentum often alone can alter perception and create new narratives — a “tail wagging the dog” phenomenon fairly common to Wall Street. All it seemingly took was a brief change in price action to prompt many financial observers to abandon their bearish dollar outlook for 2026. This renewed strength faded, turning out to be nothing more than a correction.

We favored US dollar weakness for some time now but have never premised that outlook on the Sell America dogma. Take our position in April that questioning a currency’s reserve standing — the Sell America thesis — is a far leap from questioning its position in the shifting exchange-rate ecosystem.

Year-to-date, the S&P 500 is up about 2%, US Treasuries are practically flat and trading in line with most other developed countries (with the notable exception of Japan). In fact, recent data releases show no convincing evidence of any abrupt rotation out of US Treasuries or equities. What foreign investors appear to be doing is hedging their American holdings rather than selling them outright. This has been one of our cornerstone considerations for our ongoing bearish outlook on the dollar. After a decade of US outperformance, foreign investment into the US is at or near record levels. From both a total return and hedging cost perspective, foreign investors had little incentive to hedge US currency risk until 2025. We expect this trend to extend into 2026 and to ultimately provide a downside skew to the dollar. It does not seem so at the moment, but foreign exchange (FX) markets are likely to be less exciting in 2026. Should the weak dollar trend enter its second year, it could potentially indicate an erosion of the dollar’s long-held dominance. For the time being, though, it’s Hedge, not Sell America.