Can the U.S. dollar maintain its status as a global reserve currency? And what happens when that status starts to waver? With a renegade president like Donald Trump calling the shots from the White House and spooking financial markets with trade tariffs, assets priced in dollars could be at risk.
Increasingly, investors worldwide are wondering whether it’s becoming dangerous to hold on to assets priced in US dollars, said Mabrouk Chetouane, head of global market at Natixis Investment Managers, at a press event in Paris on Thursday.
While Chetouane firmly rejected the idea of a complete “de-dollarization” of the global economy, he pointed to significant warning signs. “The weakness of the dollar explains the strength of China’s equity market,” he noted, underlining how central banks are also increasingly viewing the dollar as a potential investment risk.
Omfif expects dwindling dollar
Concerns over the dollar are also on top of mind inside the United States. “The world is openly questioning whether the US is a reliable partner,” wrote Steven Kamin of the American Enterprise Institute and Mark Sobel of US thinktank Omfif recently. Trump’s actions “may accelerate a secular decline over time in dollar dominance”, dwindling away slowly, and in the process exacerbate financial market volatility, they said.
John Levy, global macro strategist at Loomis Sayles, a boutique investment firm under the Natixis umbrella, provided some context on the potential consequences of a dollar collapse. “It’s a question of magnitude,” Levy warned, answering a question by Investment Officer. “A sudden shock could trigger large-scale banking crises worldwide.”
No firesale please
Levy emphasized that a gradual reallocation of reserves would be far less destructive. “A slow, measured drawdown—similar to quantitative tightening—could happen quietly in the background,” he explained. However, he strongly cautioned against a sudden “fire sale” scenario.
“You cannot have a loss of confidence in US Treasuries without expecting a 2008-style global financial disruption,” Levy stressed, effectively dismissing any notion that such a scenario would benefit European investors.
Meanwhile, the dollar dominance remains well entrenched. Omfif sees no viable alternatives for the foreseeable future, though a stronger European economy with more euro-safe assets could enhance the euro’s global role. ”But given growing distrust over US management of America’s economic and geopolitical foundations, investors may begin to search more intently for possible other dollar alternatives or workarounds. This may well heighten market volatility,” Sobel and Kamin wrote,
Germany’s bold fiscal approach
Addressing Europe’s response to the rapid changes in the geopolitical balance from recent weeks, Natixis’ Chetouane highlighted Germany’s innovative approach to economic revitalization. “Germany is using internal fiscal tools, not external measures like tariffs, but a strategic investment approach,” he explained.
The German government plans to spend 1 percent of GDP annually over the next decade, a massive 500 billion euro investment program focused on defense and infrastructure. “The multiplier effect is extremely important,” Chetouane noted. While initial projections suggest a multiplier of two—potentially generating 1 trillion in additional economic output—he cautioned that this might be optimistic.
“The IMF estimates a more conservative multiplier between 1.6 and 1.7,” he clarified. This investment strategy represents a significant shift in European economic thinking, emphasizing strategic infrastructure and defense spending as key drivers of economic growth.
Crucially, Chetouane stressed the importance of complementary monetary policy. “We need a policy mix that can deliver maximum effect,” he said. “If interest rates remain above neutral rates, the impact of fiscal policy will be limited.”
He called for the European Central Bank to adjust monetary policy this year, ensuring that fiscal and monetary strategies work in tandem to support economic growth and stability.
Bonds as a safe harbor
Addressing the current market volatility, Chetouane offered a nuanced perspective on investment strategy, particularly highlighting the bond market’s potential.
“Visibility is currently broken,” he acknowledged, noting the US equity market’s historical resilience. “The US market has shown a remarkable ability to rebound significantly after drawdowns of 15 to 20 percent,” Chetouane explained. However, he strongly cautioned against market timing, advising long-term investors to maintain perspective.
In the current uncertain environment, Chetouane recommended favoring safer assets, with a particular focus on bonds. “The bond market offers protection in times like these,” he stated.
While noting that European rates are under pressure, he sees this as a positive signal. “Long-term interest rates in Germany at 2.8-2.9% reflect a potential increase in growth,” he explained.
Anticipating ECB action, Chetouane expects two to three rate cuts this year, of a minimum of 50 basis points. “Favoring duration is the best way to protect your portfolio,” he advised. His key message: “Diversification is crucial in these uncertain times.”
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