The Year of the Dollar - Part II
27 June 2025
Six months into what we dubbed "The Year of the Dollar," the landscape has evolved in ways that both validate and challenge our initial thesis. While fiscal policy has indeed taken center stage over monetary coordination, the dollar's trajectory, and its implications, have unfolded quite differently than anticipated.
Bottom line
- Current conditions favor continued equity outperformance and high-beta plays, but the sustainability of this regime depends increasingly on managing the growing wall of debt refinancing ahead.
- The shift from monetary coordination to fiscal dominance continues accelerating
- Term premia are rising, as the global race to deficit funding goes full throttle
- Global liquidity abundance supports risk assets but also builds underlying tensions.
- USD remains the key variable to monitor
Our core investment thesis remains intact: focus on beneficiaries of deglobalization, fiscal dominance, and technological self-sufficiency.
Structural changes: even more fiscal than monetary
The fundamental transition we identified, from "don't fight the Fed" to "don't fight the Trump" (and Xi, and others), has accelerated beyond our December expectations. We're witnessing not merely policy preference but structural necessity driven by the mathematics of government financing.
Consider the numbers: approximately one-third of US government debt rolls over every 12 months, while the "debt wall" from pandemic-era refinancing will be due from 2025 to 2026. This isn't just an American phenomenon: governments globally face similar pressures as fiscal stimulus programs require funding precisely when existing debt needs refinancing.
Given the size of the US debt and the importance of its financial industry (a self-feeding loop), the US plays a leading role. Therefore, it is crucial to understand that the officially stated target of "lower rates and weaker USD" represents more than campaign rhetoric; it's economic pragmatism in the face of these financing realities.
In a broader sense, the tariffs' drama and the rising geopolitical tensions can be considered sub-products of such imperatives. The fundamental tensions we highlighted between the US negative Net International Investment Position (NIIP) and China's positive one haven't disappeared, but they're being resolved through different channels than anticipated.
Interest Rates and Inflation: the term premia surge
A critical but under-appreciated development is the global rise in term premia. Thirty-year bonds in Japan, Germany, and the United States are all trading at or near cycle-high yields, not because of immediate inflation fears, but due to the supply-demand imbalance from unprecedented government debt issuance.
This reflects the fundamental challenge: fiscal deficits require financing through debt issuance precisely when the "maturity wall" from pandemic-era borrowing approaches refinancing. Consequently, banking systems must expand balance sheets to absorb this debt, or central banks must provide direct monetization.
Inflation remains relatively subdued for now, but the risk skews upward. Successful fiscal stimulus spurring real economic growth or the monetization of deficits will likely create price pressures, and policymakers have little room for maneuver to avoid such an outcome. Low oil prices help maintain the benign inflation environment, providing economic lubrication without overheating signals. But should energy prices rise, the inflation dynamics could shift rapidly.
Liquidity: the not-so-hidden driver
The current market environment reflects a liquidity abundance that's both cause and consequence of fiscal dominance.
Increased liquidity reverberates through risk assets like equities and cryptocurrencies and traditional monetary hedges like gold and metals. This isn't accidental but structural. Debt financing requires either bank balance sheet capacity or central bank intervention.
When central banks provide liquidity to support government financing, that liquidity doesn't stay contained in bond markets; it flows into every risk asset category.
USD weakness has amplified this effect globally. It can be considered almost an inadvertent monetary easing that supports the different fiscal stimuli being implemented across the globe. Such an effect is compounded by avoiding the deflationary pressures that dollar strength might have created on trading partners.
The Dollar takes center stage, only in reverse
Our prediction that "the U.S. dollar will be the key variable to monitor" proved accurate, though the direction caught us off guard. The 12% decline in the DXY since January illustrates why we described the dollar as taking "center stage": its movements amplify every other economic dynamic.
Dollar weakness has provided emerging markets with breathing room, supported commodity prices, and enhanced the fiscal space of countries implementing their stimulus programs. Yet this very success creates new risks.
With the world entering what amounts to a competitive race of fiscal stimuli and liquidity creation, the weakening of the USD may have run its course.
Any hiccups in the financial system will likely spur renewed demand for dollars, potentially reversing current benign conditions rapidly. The dollar remains what we might call the "canary in the coal mine": sudden strength would signal an ominous shift in global financial conditions.
Focus on the global economy
Though supported by dynamics different from those initially expected, the consensus soft-landing scenario for 2025 continues to play out. Rather than individual national resilience, broad stimulus programs are creating the preconditions for what amounts to a global reflation.
The United States: fiscal firepower unleashed
American economic resilience continues to surprise analysts. It is driven by the fiscal stimulus we anticipated and amplified by rebounding bank credit. The combination creates powerful domestic demand, while the weaker dollar provides an unexpected competitiveness boost to American manufacturers. However, this strength comes with building contradictions. Wage inflation pressures are intensifying, and street inflation may pick up after the summer doldrums as Trump's tariffs start impacting Main Street. Such a dynamic could force the Federal Reserve's hand and surprise the market's expectations of further accommodative conditions.
At the same time, the debt refinancing imperative continues to tick, and the Fed will have to open the spigot eventually.
China: the slow but steady recovery
China's progress in high-tech industries—semiconductors, renewable energy, electric vehicles—is accelerating faster than anticipated. These investments, prioritized for years, now deliver visible results that strengthen China's position in the global technology competition while reducing dependence on dollar-denominated supply chains.
At the same time, transitioning towards a bigger chunk of the domestic economy being consumption-led requires time and money. In this respect, the PBoC is actually leading the way, having increasingly opened the monetary taps and becoming the main contributor to global liquidity in recent weeks.
Europe: the laggard searches for a footing
European markets have defied our pessimistic December assessment, though mainly for reasons that validate our underlying analysis.
The peripheral economies outperform core countries as relative fiscal differences narrow and spreads tighten.
Germany's €1tn investment program signals a profound attitude shift toward government spending, though political uncertainty continues threatening implementation credibility. Yet Europe remains the "last comer" to fiscal expansion, constrained by political fragmentation that limits the scale and speed of response compared to the US and China. And considering how the repatriation flows that helped lift European equities may have run most of their course, the result is that most European outperformance may already be behind us.
Investment implications: riding the liquidity wave
Resilient economic growth, building inflation pressures, and abundant liquidity create a powerful environment for equity markets.
This "melt-up" scenario can persist until higher yields eventually cause sufficient financial system stress, a threshold we haven't approached yet. The tactical allocation remains clear: long equity, short bonds still have significant room to run.
Liquidity resumption favors high-beta plays across asset classes, in an environment where money itself faces devaluation through fiscal and monetary expansion, tangible assets, whether equities, cryptocurrencies, or gold, offer better protection than fixed income. This doesn't mean risk is absent.
The sustainability of current conditions depends on threading a narrow path: generating sufficient real growth to justify debt accumulation without triggering yield spikes that undermine the entire framework. And there is always the impending risk of geopolitical escalation, to which the markets have thus far been fairly unsensitive.
Conclusion: evolution, not revolution
Six months into "The Year of the Dollar," we're witnessing evolution rather than revolution in the trends we identified.
Fiscal policy dominance continues accelerating, regional economic blocs solidify, and currency dynamics remain central to global adjustments. The dollar's weakness has temporarily eased adjustment pressures while amplifying liquidity conditions globally. This creates a window of opportunity for continued risk asset appreciation, but also builds underlying tensions that could reverse rapidly if financial conditions tighten.
Our core investment thesis remains intact: focus on beneficiaries of deglobalization, fiscal dominance, and technological self-sufficiency. However, the path forward requires greater attention to liquidity conditions and currency dynamics, which can quickly shift market leadership.
The year's second half will determine whether current conditions represent a sustainable transition or a reprieve before more significant adjustments. Either way, the dollar (weak or strong) continues taking center stage in global markets.
Details for each of our investment themes
- AI & Robotics - Innovation over taxation
- Blockchain & Digital Assets - Clarity, Capital, Catalysts
- Healthcare (Bionics and Biotech) - Uncertainties remain, opportunities too.
- Fintech - Deregulated, digitized, developing
- Security & Space - Fending off concerns
- Sustainable Future - Under the radar, above the noise
Catalysts
FED's liquidity. The FED opening the liquidity tap in the U.S. is more likely to be a matter of when rather than if.
Tech acceleration. Rising wage pressures and labor constraints could force faster adoption of AI and automation across industries.
Infrastructure push. Competing fiscal stimulus programs in U.S. and China to drive significant infrastructure spending and related investment opportunities
Risks
Geopolitical shock. Markets have not reacted significantly to escalating tensions, notably in the Middle East. Things may change if the US involvement becomes material.
USD gyrations. Sudden USD strength could trigger financial system stress and reverse global liquidity conditions, while excessive USD weakness could reignite inflation pressures and force premature monetary tightening.
Fiscal overreach. Competition between economic blocs could lead to unsustainable fiscal expansions, triggering bond market stress and volatility.
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