With traditional market dynamics breaking down and foreign holdings of U.S. assets at record highs, US fund houses Doubleline Capital and Pimco both warn that investors can no longer rely on the old dollar playbook. Their message comes as international sentiment builds around the need for a more balanced global currency framework.
Doubleline is telling institutional investors to prepare for a declining dollar. They point to structural shifts in global currency markets that can no longer be dismissed as cyclical noise.
In an interview with Investment Officer, Bill Campbell, portfolio manager at the Los Angeles-based asset manager, said that traditional relationships between the dollar, U.S. interest rates, and global risk appetite are breaking down.
“There are several forces likely to weigh on the dollar and push it lower over the medium term,” Campbell said. “This is not a tactical view. This is structural.”
‘Richly valued’
His remarks follow a webcast earlier this month by Doublekine founder Jeffrey Gundlach, who described recent dollar price movements as “surreal.”
Dan Ivascyn, Group CIO at Pimco, the world’s largest bond investor, sees a similar trend. He’s observing a gradual shift away from the dollar, U.S. Treasuries, and other American assets like stocks and corporate bonds. Many U.S. assets, he said, are now “richly valued.”
“The exceptional position of the U.S. will weaken somewhat in the coming years. That opens up opportunities in better-performing markets across both developed and emerging economies.”
The dollar has fallen nearly 9 percent this year against a basket of major currencies, marking its worst first-half performance since 1985. While the greenback regained some ground following the U.S. airstrikes on Iran over the weekend, the broader trend remains negative. According to Bank of America’s most recent Global Fund Manager Survey, net underweight positions in the dollar are at their highest in 20 years. The short-dollar trade is now one of the three most crowded trades globally.
A breakdown in market correlations
Doubleline’s Gundlach pointed to the unraveling of classic correlations - rising Treasury yields, weak equities, and a falling dollar - as a sign of regime change. “Every time the S&P corrected, the dollar went up. Not this time,” he said. “I think it’s truly a dollar bear market.”
Campbell stressed that the story goes beyond price action. Foreign investors now hold more than $62 trillion in U.S. assets across equities, bonds, real estate and direct investment. Even a modest reallocation away from U.S. exposure could have a meaningful impact.
“We’re not calling for that number to go to zero,” he said. “But if foreign investors simply reduce their U.S. allocations to reflect a home bias or greater diversification, the market impact is significant.”
He added that hedging costs are starting to influence positioning. Foreign investors had long run unhedged dollar exposure because of high hedging costs and a strong dollar. But with volatility rising, Campbell sees a shift. While large-scale dollar selling is still limited, increased hedging points to a more cautious tone.
Push for currency diversification
These market warnings come as policymakers outside the U.S. step up their calls for a less dollar-dominated global monetary order. Speaking at a financial forum in Shanghai, China’s central bank governor Pan Gongsheng said the international system is evolving toward a new balance between sovereign currencies.
“In the future, the global monetary system may continue to evolve towards a pattern in which a few sovereign currencies coexist, compete with each other, and check and balance each other,” Pan said.
China is expanding its renminbi-based settlement infrastructure and signing bilateral deals with trade partners to reduce reliance on the dollar. The renminbi is now the second-most used currency for trade finance and the third-most for global payments, according to Swift data. Pan also warned that the dollar is increasingly seen as a geopolitical tool, making it less appealing in times of tension.
Christine Lagarde echoed those themes in an op-ed for the Financial Times, calling the present moment a “global euro” opportunity. “The dominant role of the U.S. dollar is no longer certain,” she wrote. “This moment of change is an opportunity for Europe.”
Lagarde argued that greater international use of the euro would help lower borrowing costs and insulate the eurozone from exchange rate volatility and sanctions exposure. But she also acknowledged that European capital markets remain too shallow and fragmented to pose a full alternative to the dollar-dominated system.
Cyclical reallocation of capital
Campbell said Europe is currently benefiting from a cyclical reallocation of capital, as European equity and bond valuations become more attractive than those in the U.S. Germany’s expansionary fiscal policy and growing defense investments could support longer-term growth, he noted. Still, Campbell warned of persistent structural obstacles, including limited market depth and debt sustainability concerns in countries like France and Italy.
Fixed income repricing underway
Campbell also flagged rising term premiums as a key risk in fixed income markets. He said long-dated government bond yields are climbing not only due to inflation volatility and fiscal pressure, but also as a result of shrinking central bank balance sheets. “The decline in central bank balance sheets has been underappreciated,” he said. “That’s removing a buyer from the market, and it’s contributing to higher long-term rates.”
U.S. term premiums are now estimated between 70 and 90 basis points, up from negative territory just a few years ago. Campbell believes many investors still treat long-term Treasuries as a portfolio hedge, but warns that assumption is becoming outdated. “Investors may be surprised that government bonds no longer provide the protection they once did,” he said. “That has big implications for how portfolios are constructed.”
In response, DoubleLine is advising clients to trim passive exposure to long-duration bonds and focus on active curve positioning and high-quality income. Campbell sees opportunities in front-end rates and investment-grade corporate debt, especially for euro-based investors managing FX and rate risks.
“Fixed income can offer yields that are higher than dividends in equity strategies, with lower volatility,” he said. “But you need to be selective and nimble. Buy-and-hold doesn’t cut it anymore.”
He was cautious on private credit and lower-quality bonds, saying the current environment doesn’t reward stretching for yield. Instead, he said investors should use today’s relative calm to build carry in safer assets and prepare for a more volatile second half of the year.
A gradual realignment
Campbell’s central message is that the shift in the dollar’s global role is real, structural, and already underway. “This is not about the dollar collapsing,” he said. “It’s about a gradual realignment. And if you wait too long to adjust, the opportunity costs will start to add up.”
At Pimco, Ivascyn agreed the dollar’s role is changing, but emphasized the U.S. still offers compelling strengths. “The American economy is resilient, the business environment is robust, and its innovation capacity, particularly in technology and artificial intelligence, is impressive,” he said.
“So we’re not turning our backs on U.S. investments. But where possible, we are deliberately diversifying. That helps reduce portfolio volatility and improve returns for our clients, across both public and private markets.”