Not so long ago, the rise of the dollar was a consensus view on the markets, and many investors were betting on a return to euro-dollar parity. That was at the end of last year, in the wake of Donald Trump's election. But as is often the case, the consensus has been reversed. As a result, the eurodollar crossed the 1.15 threshold again at the beginning of the week. This is the first time since the end of 2021.


                                                                                                                                                                                 Source: MarketScreener

As we explained earlier this week, it is not only the dollar that has been falling in recent weeks, but all US assets (stocks and bonds). Focusing on the currency, the dollar index – the dollar against a basket of reference currencies – is down 8.5% since January 1.

Behind this decline is probably a movement away from US assets. This is because the Trump administration's economic policy is likely to weigh on global growth, and US growth in particular. This is shown by the IMF's new growth forecasts, published this week. Beyond the growth figures themselves, the unpredictability of the United States on the one hand, and the questioning of the rule of law and therefore of the long-term investment framework on the other, are leading to a loss of confidence among investors.

A burden for the US?

But is this a problem for the Trump administration? Although Scott Bessent often reiterates his commitment to a strong dollar policy, Donald Trump's goal is to weaken the dollar. This should stimulate US exports and give greater weight to the manufacturing sector. In the White House, this issue is being championed by Stephen Miran, who heads the Council of Economic Advisers. He believes that the chronic overvaluation of the dollar is the main cause of US trade imbalances. An overvalued dollar is therefore a burden for the US, which provides liquidity to the entire world and military protection to its allies.

His main battle is therefore "burden sharing." The idea is that other countries should buy more US products or provide more financing to the US, for example by issuing perpetual zero-coupon bonds. All of this would be formalized in the Mar-a-Lago agreements—named after Donald Trump's residence in Florida. The name refers to the Plaza Accords of 1985, when France, the United Kingdom, Japan, Germany, and the United States agreed to devalue the dollar.

All this remains theoretical for the time being. To quote a note from the Edmond de Rothschild team, the Mar-a-Lago agreements are a project "so unfinished and so out of the box that it remains speculative." Indeed, the world has changed somewhat since 1985, and dollar assets are no longer concentrated in the few countries that signed the Plaza Accords.

Finally, it is important to remember the implications of a currency devaluation. On the one hand, it boosts the competitiveness of US exports. But it also makes imports more expensive, which is likely to fuel inflation. Another important point to mention is that a currency decline is in principle positive for financial conditions and therefore for growth. But if it reflects a significant outflow of US assets, higher bond yields would offset the positive effect on financial conditions.

The dollar for lack of anything better

It is important to distinguish between two issues: the decline of the dollar and the loss of the dollar's status. If investors continue to reduce their exposure to US assets, the dollar may continue to fall. Indeed, US markets have attracted flows for decades. According to the most recent data published by the US Treasury Department, the value of US assets held by non-residents exceeds $31 trillion.

The dollar may therefore continue to decline. But for it to lose its status as a reference currency, there would have to be an alternative. However, we do not really see one. The two other major economic zones are Europe and China. The yuan is a currency controlled by the Chinese authorities, not to say manipulated. As for the euro, the debt markets lack depth and the eurozone is not yet fully integrated.

For the time being, the dollar is undoubtedly the reference currency. To give a few figures that illustrate this dominant role, the dollar is currently used in 88% of trade and 59% of central bank foreign exchange reserves. And the United States has the most structured, deepest, and most liquid financial markets in the world.

The conclusion is therefore that even if the United States is currently doing everything wrong, the dollar will not lose its status anytime soon. When you take into account the political equation and the depth and liquidity of the capital markets, there is really no alternative to the dollar. A large proportion of global savings will therefore continue to be invested in the United States.