Is USD dominance over? How to manage currency exposure

The US dollar has long been the bedrock of the global financial system, underpinned by “US exceptionalism”—a unique combination of innovation, robust corporate earnings, and a resilient labour market. 

Explained by many with the US equity outperformance, this exceptionalism allowed the dollar to trade at a premium to its fair value based on purchasing power parity. As we move deeper into 2025, a palpable erosion of confidence in this narrative is observed – what has gone on? 

What is driving the USD weakness in 2025?

Dollar strength faces challenges from several fronts, but the most recent trigger was an escalating tariff tension and its implications on the US economy and its innovative prowess. Diminished confidence in US assets and the USD as a reserve currency is another factor that is weighing on investor sentiment. 

So far this year, the manifested USD weakness can be shown in two “broken patterns”.

The first significant departure from historical patterns is the dollar's behaviour despite interest rate differentials.

Traditionally, higher US Treasury yields relative to other developed market government bonds would attract capital and strengthen the dollar. Yet, this year, the dollar selloff, even with a yield advantage, suggests investors are less inclined to “close the gap”.

Second, the dollar’s traditional role as a safe-haven currency during times of stress has also been challenged. During the equity sell-off in March and April, the USD sold off alongside equities, rather than strengthening. 

Whether this is a temporary blip or a more lasting structural shift, it signals a loss of confidence in US assets, inevitably raising questions about the USD's long-term position as the world's primary reserve currency.

Reality check: USD strength and dominance

Despite the concerns, it is critical not to mix up dollar strength with dollar dominance. While the US dollar may currently be experiencing periods of weakness, this does not equate to an erosion of its fundamental global dominance. The proof is in the bedrock of its role:

1. Unparalleled liquidity and breadth 

The USD’s sheer, unparalleled liquidity and breadth across global equity, debt, foreign exchange, and oil markets remain unsurpassed. 

The USD was involved in 88% of global foreign exchange transactions, making it the single most traded currency in the FX market, according to the Atlantic Council. As of Jan 2025, the dollar made up 57% of global foreign exchange reserves. The oil markets are denominated in the greenback, too. 

This goes to show that USD is the indispensable medium of exchange and primary unit of account for the vast majority of global transactions, regardless of its current exchange rate.

2. No immediate alternative

Despite growing discussions about multi-polar currency systems or even cryptocurrencies, the practical infrastructure, regulatory frameworks, and, most importantly, the deep-seated confidence required to displace the dollar's position are simply not ready. Such a shift is years, if not decades, away.

Central banks may have marginally diversified exposure away from USD and USD assets into other currencies and assets, which is considered a healthy sign. For now, there simply isn't a viable alternative that can replicate this depth and liquidity.

“Should I rotate into gold?”

USD stability, rising fiscal debt in the US, and ongoing geopolitical tensions are the reasons that gold emerges as an option for risk-averse investors and those who are looking for a store of value. Even central banks are stockpiling gold, propelling a growth of 26% in spot prices year-to-24 Jun, data from the World Gold Council shows.

Those who consider a greater allocation to bullion need to acknowledge its limitations as a yield-generating asset. That means the absence of an intrinsic yield in gold makes it challenging to determine a “fair value” or an optimal allocation. 

While gold has outperformed the stock market in 43% of years between 1925 and 2015, its effectiveness as a haven asset is not unconditional. Inspecting the historical data, we see that gold has reported a weaker average annual return compared to the Dow Jones Industrial Average’s 7.3% over the past century.

Gold’s protective qualities depend on specific catalysts driving market downturns, such as macroeconomic events or geopolitical shocks, and the outcome has been mixed. We generally advise investors to view gold as a portfolio diversifier and a hedge against broader currency and systemic risks, rather than a growth driver, and importantly, to take a holistic view of the portfolio. 

Read more: Tempted by ‘safe’ assets in times of uncertainty? Think again

Understanding the HKD-USD peg and HIBOR fluctuations

Specifically for local investors, what should one know about the currency and interest rate?

Hong Kong’s interest rates often track those set by the US Federal Reserve, but local liquidity conditions can cause HIBOR (Hong Kong Interbank Offered Rate) to diverge from US interest rates. 

The HKMA intervened in the foreign exchange markets on 2 May and several times thereafter as a surge in demand for the HKD pushed it to the upper limit of its band versus the USD under the dollar peg. The strength in HKD was spurred by a broader selloff in the USD, equity inflows into the HK market and inflows for the largest global IPO year-to-date for EV battery maker, CATL. 

The significant sales of the HKD by the HKMA increased the aggregate balance of the banking system, injecting liquidity into the market and resulted in a notable drop in short-term rates. 

Given these, the main currency risk for a Hong Kong investor holding USD assets comes not from the HKD-USD exchange itself (as it’s designed to be managed), but from potential depreciation of the USD against other global currencies if you have liabilities or future needs in those other currencies.

Guide to review currency, yields, and US stock and bond exposure

1. Review your current and future liabilities

Start by reviewing your immediate and projected liabilities. This includes everything from monthly bills and loan repayments to future large outlays like education fees or property down payments. Then, match your currency mix accordingly. 

This approach also works for expenses and liabilities in different currencies, such as overseas tuition fees or property mortgage repayments. This provides certainty over the amount you will have available, and you can mitigate the risk of unfavourable exchange rates affecting your financial goals.

Matching assets and liabilities can help align currency holdings with future cash flow needs, reducing potential risks.

Read more: How much do you need to retire in Hong Kong?

2. Beware of required FX conversion time and fees

Even if you choose to hold investments denominated in a currency with an exchange rate that’s relatively stable against the HKD, like the USD due to the peg, it's crucial to factor in the time and cost involved in converting your funds. 

Fees can be significant and can eat into your capital. When moving money, especially larger sums, between banks, you will encounter telegraphic transfer (TT) fees. More importantly, these transfers can involve processing delays. Such delays can be particularly critical when dealing with liabilities that have strict deadlines, potentially leading to penalties.

Beyond explicit fees, a small markup is commonly applied on the exchange rate banks offer for conversions. This is effectively a hidden fee that reduces the actual amount you receive. To understand the true cost, always compare your bank's offered rate with the mid-market rate (the one you see on Google or financial news).

Note: Endowus does not charge any currency conversion fees and does not take a spread or earn from the bid-ask spread from FX transactions. Read more in our FAQ. 

3. Don’t chase yield blindly

While tempting, do not let attractive USD money market fund yields be the sole driver of your asset allocation. 

Understand that the interest rate differential is often a reflection of underlying economic conditions and future currency expectations. This scenario can change rapidly, with shifts in monetary policy, economic prints, or even unexpected events. We generally advise against predicting these short-term movements.

Ultimately, money market funds – regardless of their currency – are ideal for short-term cash needs and emergency funds. Keeping excessive capital in these low-risk, cash-like instruments means missing out on the potential for higher, inflation-beating returns over time offered by equities or longer-duration bonds, which are typically essential for long-term financial goals like retirement.

Read more: Warren Buffett’s Berkshire Hathaway sells stocks. Why is it not a template to copy?

4. Lastly, on US stocks, bonds and other assets

The US may not enjoy the same level of outperformance in the following decade as it did in the last one. 

However, many elements of what propelled US exceptionalism remain: The mega-cap tech companies in the US continue to have strong moats that few other companies around the world have, and the US continues to have the deepest and most liquid financial markets. As such, it is hard not to have US assets as a core allocation.

Investors’ focus should remain on building a globally diversified, asset-class diversified, and sector-diversified portfolio. Chasing short-term currency and capital markets fluctuations can be detrimental. 

Read more: The laws of nature and why markets go up in the long term

Endowus advisors, here to help

The right approach depends on your unique financial situation. Regularly reassess your currency exposure and adjust your strategy as needed to maintain a balanced portfolio that aligns with your long-term objectives. 

Endowus now supports investments in Canadian dollar (CAD), euro (EUR), and British pound (GBP), giving you more currency options beyond HKD and USD. This added flexibility allows you to align your portfolio with future foreign currency needs—such as overseas education or property payments.

Open an account today to enjoy zero-fee currency conversions and access to a broader range of top-tier funds. Seeking tailored recommendations based on your unique goals? Feel free to reach out to our client advisory team.

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