Fears that the U.S. dollar is entering a period of rapid debasement appear overdone, even as the currency faces longer-term pressure.
The dollar has been volatile in recent weeks and at one point touched multi-year lows, fuelling talk of “Sell America” trades and currency debasement.
Access deep analyst research, insights with InvestingPro
While the narrative has gained traction, BofA said evidence in markets does not yet support a structural shift away from U.S. assets.
While BofA maintains a bearish long-term view on the dollar but expects any weakening to unfold slowly through 2026 and 2027.
Positioning and flow data show little sign of investors exiting U.S. assets in a coordinated way. Measures of dollar risk premia have risen only modestly, and options positioning suggests the market is not significantly more short on the dollar than it was three months ago.
Cross-asset flows tell a similar story. Equity and fixed income inflows do not indicate that foreign investors are pulling capital from the U.S. in size.
There has been only one day this year when both the dollar and U.S. equities were sold heavily at the same time, which BofA said does not align with a broad debasement scenario.
Instead, currency hedging is a more likely response from global investors. European asset managers may increase hedging on their U.S. exposure, which could add gradual pressure on the dollar without triggering a sharp selloff.
Macro signals also do not point to rising debasement risks. Inflation expectations remain anchored and fiscal concerns, while widely discussed, have not translated into market stress consistent with a loss of confidence in the currency.
Part of the expected dollar drift lower may come from strength elsewhere. BofA sees several potential supports for the euro, including improving euro zone growth later this year, fiscal stimulus in Germany, and possible spillover from China stimulus. Structural factors such as defense spending and trade agreements could also support European assets over time.
