Long-Term US Dollar Risks Persist

We believe that the tariffs are net negative for the USD as they are a massive tax increase on US businesses and consumers and damage the reliability of the US as a trading and financial partner. In the short term, however, the immediacy of the negative demand shock outside the US and need to secure US funding during times of extreme market stress may result in periodic sharp rallies in the dollar.

After its sharp year-to-date decline, the US dollar appears oversold and due for a bounce. Any positive news on tariff-reducing trade negotiations or the US fiscal budget may trigger a modest rebound. However, we believe any such rebound will be limited and give way to a longer-term bear market.

According to the Bureau of Economic Analysis (BEA), non-US investors hold $59.8 trillion in US assets, net of derivatives—$33.1 trillion of which is in portfolio investments. Even if investors choose to maintain large allocations to US assets due to a lack of compelling alternatives, the case for increasing the currency hedge ratio on those holdings is strong. A conservative 10% increase in average USD hedge ratios on portfolio investments alone would imply $3.3 trillion in US dollar selling over the next several years—a solid foundation for a sustained US dollar bear market.

Why would a higher hedge ratio—or a lower outright allocation to US assets—make sense? US valuations and earnings estimates remain elevated, while the country faces a prolonged and difficult fiscal consolidation over the next 10 to 15 years. Tariffs continue to threaten long-term productivity growth, and interest rates for consumers and businesses are likely to rise even if the US Federal Reserve delivers meaningful easing. Meanwhile, increasing policy uncertainty, coupled with isolationist tendencies, is making the US appear less reliable as a trade, financial, and political partner in the eyes of the global community.

Outside the US, we expect currencies to outperform in countries with greater fiscal and monetary flexibility, particularly those likely to benefit from repatriation out of unhedged US assets, whether via direct asset sales or increased hedging activity. The euro, yen, and, to some extent, the Swedish krona stand out. The British pound may benefit from relatively high yields and a more moderate US tariff stance, although its upside is limited by tight fiscal constraints.

US Dollar (USD)

We have long held the view that the US dollar is likely to decline by at least 15% over a multi-year horizon, as US yields and growth revert toward G10 averages and the country continues to grapple with high fiscal and current account deficits. We believe the recent tariff shock is likely to accelerate and deepen this anticipated downturn. While temporary periods of strength may emerge during episodes of market turmoil, we expect sustained US dollar weakness driven by softer growth prospects and persistent portfolio outflows—whether through outright asset sales or increased currency hedging of US dollar exposures.

Given the increasingly compelling bear case for the US dollar, we see it becoming a less reliable safe haven, even in the current market crisis. That does not mean it will entirely lose its haven status. On the most volatile days, we still expect the US dollar strength—driven by concerns about the near-term pain of tariffs on export-driven economies and ongoing demand for US dollar funding.

However, we find it hard to envision safe-haven demand for the dollar reaching prior extremes. The longer-term US growth outlook has deteriorated, and there is significant scope for medium- to long-term portfolio rebalancing out of US assets—even if only via increased hedge ratios on the historically high share of foreign-held, unhedged positions.

Canadian Dollar (CAD)

Canada appears at risk of a mild recession—one that could be worsened by a slowdown in US growth. Weak manufacturing and services PMIs, alongside softening labor market data, highlight the economic drag created by ongoing tariff uncertainty. As a result, the Canadian dollar may face renewed pressure against the broader G10, driven by recession concerns, spillover from a weakening US dollar, subdued domestic consumption and investment, and softer commodity prices.

However, beyond the near-term downside, there are several compelling reasons to expect a recovery in Canadian dollar, particularly versus the US dollar and the Swiss franc. The Canadian dollar remains undervalued by our long-term fair value metrics. Canada has been spared reciprocal tariffs, enjoys more room than the US for prompt monetary and fiscal stimulus, and has significant capacity for deregulation and expanded trade outside North America.

We also believe that current North American tariff tensions are likely to result in a renegotiated United States–Mexico–Canada Agreement (USMCA) that largely preserves regional free trade. Later this year, we see USD/CAD falling back into the low 1.30s as trade clarity improves, the Federal Reserve resumes rate cuts, and Canada begins to benefit more visibly from the Bank of Canada’s aggressive easing and supportive fiscal policy.

Euro (EUR)

Our tactical model outlook for the euro is currently negative; however, we discount this signal given the model’s inability to fully capture the potential structural shock introduced by tariffs. In contrast, we remain more constructive on the currency. Household balance sheets are solid, unemployment is low, real wage growth is positive, and the planned increase in defense spending—alongside the proposed €500 billion German infrastructure fund—are all supportive for the euro. Moreover, the case for European Union (EU) investors to reduce their substantial exposure to US assets, or at least increase average currency hedge ratios, is growing stronger as the US becomes a less dependable trade and security partner.

The key drawback remains soft current growth. If the tariff shock persists, it is likely to weigh further on activity through Q2 and Q3—a trend our models already reflect, which explains the negative tactical signal. Still, we believe the EU is likely to avoid recession, assuming timely, targeted fiscal stimulus and additional ECB rate cuts help offset the impact.

That said, near-term economic risks remain tilted to the downside, which may limit the euro’s ability to rally, particularly against traditional safe havens like the Japanese yen and Swiss franc. While we expect meaningful euro upside versus the US dollar over the medium term, the euro still screens as expensive relative to more cyclical currencies and is therefore likely to underperform the Scandinavian currencies and the Australian dollar once the immediate tariff-driven volatility subsides.

British Pound (GBP)

We are bearish on the pound over the short to medium term relative to the G10 average, though we see upside versus the US dollar in the wake of the tariff announcements. The UK is subject to the 25% auto tariff and the across-the-board 10% tariff, representing a much smaller hit compared to the EU, Japan, Switzerland, and most of Asia. Even so, we expect the UK to experience negative spillovers from a broader global growth slowdown.

The UK’s limited capacity to deliver near-term monetary or fiscal stimulus means policymakers will be hard-pressed to fully offset these headwinds, even if the direct impact is smaller than that faced by others. This points to deeper and potentially earlier Bank of England rate cuts in late 2025 and into 2026, which undermines the medium-term outlook for the pound against G10 ex-US currencies.
That said, while sterling looks challenged relative to most of the G10, we expect it to trade above 1.35 versus the US dollar by year-end and to approach 1.45 in 2026. We also see the pound outperforming the expensive, low-yielding Swiss franc.

Japanese Yen (JPY)

Our model is positive on the yen over the tactical horizon, driven by our short-term value indicators, which suggest the yen is currently overbought following its sharp appreciation in early 2025. The global demand shock from recent tariffs supports further declines in global yields—an environment that tends to favor the yen.

Beyond yield dynamics, the yen retains strong safe-haven appeal, particularly as the US economy absorbs the impact of what is effectively a massive tariff-induced tax hike. The potential for sustained portfolio outflows—either via direct US asset sales or increased hedging of dollar exposures—further strengthens the case for yen appreciation.

Accordingly, we maintain a constructive view and see the yen as the preeminent safe-haven currency during this period of disruption. Over the medium to long term, we expect further gains, supported by the currency’s significant undervaluation in our fair value model and the outlook for continued downward pressure on global yields.

Swiss Franc (CHF)

The Swiss franc may post modest further gains against the US dollar if our broader USD bear market view proves correct. However, beyond this period of market uncertainty, we expect the franc to materially underperform all other G10 currencies. It remains the most expensive currency in the G10 based on our long-run fair value estimates and offers the lowest yields and inflation levels. Core inflation has fallen to just 0.6% YoY, with headline inflation now at 0.0% YoY. Recent franc strength, combined with an expected decline in rental prices, is likely to push inflation below zero in the coming months.

In response, we expect the Swiss National Bank to cut rates to zero in June and adopt a more interventionist stance in the foreign exchange market to weaken the currency.

While the broader portfolio rebalancing trend away from US assets should support long-term US dollar weakness, it is unlikely to provide a comparable boost to the franc. Swiss investors already hedge a large portion of their foreign currency exposure, leaving limited room for hedge ratio increases—that is, limited additional US dollar selling and franc buying. And to the extent that Swiss investors opt to sell US assets outright in favor of a more geographically diversified portfolio, the currency impact will likely be muted due to their already-high hedge ratios.

Norwegian Krone (NOK)

We expect substantial volatility in the Norwegian krone during this tariff shock, given its high beta to both equity and oil markets. That said, we remain broadly constructive on the currency, supported by high relative interest rates and resilient underlying growth. The sharp selloff on 4 April—when Norwegian krone dropped 4.05% against the US dollar and 3.2% against the euro—illustrates the downside risks during periods of heightened market uncertainty.

Oil prices may remain under pressure due to rising OPEC+ production and weaker global demand tied to the tariff-driven slowdown—posing a key headwind for Norwegian krone in 2025. Still, the krone remains historically undervalued relative to our fair value estimates and is backed by Norway’s solid long-term growth prospects and robust sovereign balance sheet.

Importantly, Norway has considerable fiscal and monetary flexibility to cushion the economy and prevent long-term damage from the current shock. We believe the krone is setting up for strong gains once markets reach peak tariff tension, reprice risky assets and oil, and begin shifting focus toward tariff reductions and coordinated stimulus measures.

Swedish Krona (SEK)

We maintain a positive bias on the Swedish krona in the short term, supported by relatively solid growth expectations and improved carry, as global central banks cut rates while the Riksbank remains on hold. Over the long term, we see the krona as deeply undervalued relative to our fair value estimates.

From a forward-looking perspective, Sweden stands to benefit from both fiscal and monetary policy flexibility, as well as the broader trend of portfolio rebalancing. The potential for large foreign asset holders in both Sweden and the EU to reduce US exposure—particularly through increased US dollar hedge ratios—should provide a meaningful tailwind for krona appreciation.

That said, as a small open economy with a relatively illiquid currency, Sweden is likely to experience bouts of downside volatility during this tariff shock. This will be especially true if markets shift their focus toward the near-term drag tariffs may impose on regional growth, despite the krona’s relatively stable performance in April.

Australian Dollar (AUD)

Our models are slightly positive on the Australian dollar, supported by stable—though below-trend—growth and relatively high yields. That said, near-term risks remain elevated given the current environment of heightened uncertainty. Direct tariffs on Australia are limited, but spillover effects from tariffs across Asia, combined with Australian dollar’s historically high beta to global equity market selloffs, present notable short-term downside risks.

As we approach peak tariffs and look toward negotiations aimed at reducing reciprocal tariffs, the Australian dollar has significant potential for a longer-term rally. Australia, like most Asian economies, has ample room for fiscal and monetary stimulus to mitigate tariff-related damage. Moreover, Australian investors hold historically high unhedged US dollar asset exposure, which we expect to lead to higher currency hedge ratios or outright portfolio diversification—both supportive of Australian dollar appreciation.

Relative to our long-run fair value estimates, the Australian dollar remains deeply undervalued versus the US dollar, British pound, euro, and Swiss franc, leaving it plenty of upside room.

New Zealand Dollar (NZD)

Our tactical model maintains a slightly negative stance on the New Zealand dollar. The country remains vulnerable to slower growth in Asia and has historically shown sensitivity to equity market downturns. This latest tariff shock adds pressure during a particularly fragile period for New Zealand, characterized by rapid monetary easing, an early-stage economic recovery, and heightened exposure to global volatility due to its substantial current account deficit.

On a more constructive note, the significant depreciation of the New Zealand dollar over the past six months already prices in much of the downside risk—factoring in weaker growth, tariff concerns, and lower yields. This may help limit further losses in the near term.

Looking ahead, our long-term outlook is mixed. While our fair value estimates suggest the New Zealand dollar is undervalued relative to the US dollar and Swiss franc—implying potential for appreciation—it appears overvalued against the yen and Scandinavian currencies.