The Structural Short: De-dollarization Accelerates Amidst Geopolitical Rifts

The post-WWII dominance of the US Dollar is facing its most severe stress test to date. New data reveals that the Greenbacks share of global central bank reserves has plummeted to roughly 40%, a 20-year low. This structural decline is being accelerated by a convergence of geopolitical fracturing and domestic US policy shifts.

The 'Dollar Smile' May Be Broken

Standard Forex theory relies on the “Dollar Smile”—where the USD outperforms during US economic booms or global recessions. However, Morgan Stanley's Stephen Jen suggests this dynamic is faltering.

• Political Devaluation: President Trump's recent comments expressing comfort with a weaker dollar have undermined the currency's “safe haven” status. The market perceives a tacit administration policy to devalue the debt burden via a weaker currency.
• Sanctions Blowback: The weaponization of financial rails has pushed the “BRICS+” bloc and ASEAN nations to aggressively diversify. Gold has been the primary beneficiary, reportedly overtaking USD assets in specific sovereign portfolios for the first time in 2026.

Market Implications

The correlation between US economic strength and USD strength is decoupling.

• Currency Pairs: The market is witnessing a “risk premium” being attached to US assets. This supports EUR/USD and GBP/USD despite weaker growth fundamentals in Europe.
• Warning Signal: JP Morgans risk reversal metrics for the Dollar have hit their most bearish levels since last June, indicating that institutional investors are hedging heavily against a prolonged Dollar slide.

While the Dollar's demise has been predicted prematurely for decades, the current combination of fiscal dominance (uncontrolled deficits) and political will to weaken the currency creates a unique bear case for the medium term.