The Dollar Is Bleeding—and the Knife Is in America’s Own Hand

 

The dollar is losing its safe-haven magic because America is now the risk, not the refuge, and global investors are quietly preparing for a long, painful decline that could hit wallets worldwide.

I have seen this movie before, and it never ends well. The hero thinks he is invincible. The crowd cheers. The lights flash. Then the floor gives way. That is where the dollar is standing right now—on a stage built from confidence, daring gravity to blink first. Confidence, as William Treiber warned the Federal Reserve back in 1961, is a fragile flower. Step on it once, and it does not grow back the same. Today, I can almost hear that stem snapping.

The dollar is supposed to be the safe house when the storm hits. When markets panic, people run to Treasuries. When wars break out, they clutch greenbacks. That has been the rule for decades. But here is the twist that feels ripped straight out of a noir script: the trouble is no longer outside the house. The trouble is American-made. Tariffs, debt, political noise, and erratic policy have turned the dollar from a fire escape into a question mark. When the call comes from inside the house, nobody sleeps.

Since the beginning of 2025, the dollar has already fallen by about 10%. That is not a rounding error. That is the sound of international investors quietly shuffling their feet toward the exit. Markets reacted instantly when Kevin Warsh emerged as President Donald Trump’s pick to replace Jerome Powell at the Federal Reserve in May. Warsh talks dovish now, but markets remember his hawkish instincts. That memory briefly slowed the dollar’s slide. Briefly. Because this is not just about interest rates. It is about trust.

For years, analysts comforted themselves with one idea: even if America stumbles, the dollar will survive because there is no alternative. That logic is lazy. The dollar does not need a rival to fall. It just needs investors to stop believing it is the least bad option. Central banks around the world have already sent a signal. In 1999, about 72% of global foreign-exchange reserves were held in dollars. Today, that figure is about 57%. Gold has surged back into vaults. The Australian dollar, Canadian dollar, and Japanese yen have picked up crumbs from the table. This is not rebellion. It is insurance. When the roof creaks, people buy umbrellas.

What really keeps me up at night is not reserves. It is risk. Seventeen years ago, about 38% of foreign portfolio investment into America came from governments and central banks buying safe debt. Back then, politicians obsessed over the $1trn-plus in Treasuries held by China. Today, sovereign holdings make up just 13% of foreign-owned American portfolio assets, the lowest level in modern history. The rest is risk money. Stocks. Tech. Growth dreams.

Foreign investors are not buying America for safety anymore. They are buying it for returns. Since the global financial crisis of 2007–09, the share of foreign-owned American assets held in stocks has nearly tripled, jumping from 21% to about 58%. That tells me everything. This is not about shelter. This is about chasing upside. And upside has a habit of vanishing fast.

For a while, the bet paid off. American companies were innovative, aggressive, and wildly profitable. Tech stocks sucked in global capital like a vacuum. But cracks are spreading. Last year, as tariffs returned and fears of an artificial-intelligence bubble grew teeth, American stocks underperformed their global peers by 5 percentage points. That was the worst gap since 2009. The so-called Magnificent 7, the tech giants that carried the market on their backs, have gone mostly flat for 4 months. Software stocks have slid. Emerging markets are waking up. Europe and Asia are starting to look interesting again. That is how rotations begin—quietly, then all at once.

Here is the moment that should scare anyone who still believes in the dollar’s invincibility myth. During several tariff-driven shocks—April, October, January—stocks fell, and long-term Treasury yields rose. Read that again. When fear hit, Treasuries did not rally. They sold off. That breaks the script. For decades, Treasuries were the reflex trade in chaos. Now they wobble because the American government itself is the source of the chaos. You cannot sell fire insurance while striking the match.

Some investors are already acting. Pablo Bernengo of Alecta, a Swedish pension fund managing more than $150bn, admitted they have reduced their US government bond holdings in stages since early 2025. His reasons were blunt: policy unpredictability, budget deficits, and rising national debt. That is not ideology. That is risk management. Others are still piling in. Sovereign investors poured about $132bn into American assets in 2025, nearly double the 2024 total. Strip out the Saudi purchase of EA Games, and investment still hit a 6-year high. On the surface, that looks reassuring. Underneath, it hides a darker move.

Hedging.

Investors may not be selling America yet, but they are selling dollars. Hedging unprotected exposure means dumping greenbacks to cover risk. That mechanically pushes the currency lower. Hedging surged in April after Trump’s tariff announcement. Foreign money flowed into hedged exchange-traded funds and avoided unhedged ones. That is not panic. That is preparation. And preparation tends to spread. One foreign pension investor put it plainly: fast money moved in 2025, slower money will follow. Another wave, and another wave. That is how tides work.

The bond market is whispering too. Government bonds issued by other G7 countries now yield about 2.8%, the highest level since 2008. The yield gap between those bonds and US Treasuries has shrunk from 2.2 percentage points at the end of 2024 to about 1.2 today. The premium America once enjoyed is thinning. If returns elsewhere start to look competitive, loyalty evaporates. Money has no homeland.

I remember the last time this happened. Between 2002 and 2008, after the dotcom bust, American stocks lagged Europe and emerging markets. The dollar fell by about 40%. That decline happened while central banks were still stockpiling dollars. Today, they are not. If history rhymes, the verse could be uglier this time.

Kevin Warsh stands at the center of this storm. He knows the risks. In 2010, during the European debt crisis, he warned that the dollar’s privilege is not a birthright. It must be earned and re-earned. Now he may inherit a currency weakened by politics, debt, and doubt. No rival is ready to replace the dollar. But it does not need replacing to be wounded. If American assets stop outperforming, the feedback loop turns vicious. A weaker dollar reduces America’s weight in global indices. Index funds sell. Stocks fall. The dollar weakens further. The spiral tightens.

I do not see collapse tomorrow. I see erosion. And erosion is worse because it feels slow—until the cliff disappears beneath your feet. The dollar’s power rests less on faith now and more on performance. That is a dangerous place to be when the world is watching, waiting, and hedging.

 

On a different but equally important note, readers who enjoy thoughtful analysis may also find the titles in my  “Brief Book Series” worth exploring. They can also read the books here on Google Play: Brief Book Series.