Sterling’s recent rally has little to do with the UK economy suddenly outperforming expectations. It has everything to do with the dollar falling out of favour.
When the pound hit $1.365 this week—its strongest level since early 2022—it was a flashing red signal that international investors are losing faith in the greenback.
Let’s not pretend this is about interest rates. The Federal Reserve is still holding firm, while the Bank of England is edging towards cuts. Under those conditions, textbook economics would expect a stronger dollar.
But this isn’t about rate differentials anymore. This is about confidence. And right now, global confidence in the US dollar is eroding.
The dollar has lost nearly 9% of its trade-weighted value since the start of the year. That’s not a dip. It’s a realignment and a warning. Despite all the noise around strong US growth and high yields, capital is drifting away. And the reasons are political.
The White House has reignited a tariff war just as supply chains begin to stabilise. The federal deficit is on track to surpass $2 trillion, with no credible plan for fiscal restraint. And the executive branch is openly undermining the independence of Congress, the judiciary, and the central bank.
For global investors, this isn’t background noise, it’s now core to portfolio risk.
The days of assuming the dollar is immune from governance concerns are over. For years, international markets treated the greenback as untouchable—politics be damned. But those assumptions are cracking. The risks that once sat quietly in the background are now front and centre, and they’re being priced in.
The shift is subtle but real. The dollar still dominates global reserves, but even that dominance is slipping. Its share of global central bank holdings fell to 58.4% in the first quarter—the lowest level in almost 30 years.
The trend is gradual, but the direction is clear. Policymakers around the world are no longer treating the dollar as automatic default.
This moment demands strategic clarity. Investors who treat the dollar as perpetually strong are playing the last game, not the current one. The market is now treating the US as it treats every other country: judging its currency not by legacy status, but by fundamentals—fiscal balance, institutional stability, and political coherence.
None of that bodes well for the dollar in the near term. What’s more concerning is that this weakness isn’t linked to any obvious catalyst that can be easily reversed. This is not about an interest rate cycle or a temporary macro wobble. It’s about trust, and trust doesn’t snap back on a pivot or a policy tweak.
In this environment, passive exposure to the dollar is no longer neutral. It’s an active bet on a political system many believe is becoming less predictable, less disciplined, and less transparent. That’s not a bet I’d want to make.
This shift opens the door to opportunity. The pound has gained ground not because of strong fundamentals, but because it’s seen as less chaotic by comparison. The euro is benefitting from its relative policy conservatism.
Gold is once again doing its job as a store of value in times of institutional doubt, rising over 15% this year. Even Bitcoin, for all its volatility, is behaving like an alternative hedge against fiat instability. Younger investors instinctively understand this—older ones would do well to catch up.
The US still benefits from deep capital markets, a dynamic private sector, and the inertia of dollar dominance. But none of those are immune to political damage.
Investors should stop pretending this is just a passing phase. The Trump administration’s second term has already made it clear that tariffs, spending, and institutional pressure will define the next four years. The result is a new risk premium: one that hits the dollar first.
Portfolio strategy must reflect this. Exposure to assets denominated in alternative currencies, especially those backed by credible fiscal and monetary policy, is essential. So too is a reassessment of real assets: commodities, infrastructure, and digital stores of value.
These are the buffers that will matter most in a world where currency credibility can no longer be taken for granted.
Investors can no longer afford nostalgia. The dollar is not the safe haven it once was. This is the time to reprice assumptions, reposition exposures, and prepare for a future where confidence—not history—drives value.
What’s being priced into FX markets now isn’t just policy missteps. It’s a deeper uncertainty about the long-term direction of the United States.
Currency markets are reacting not to speeches or data points, but to the steady erosion of institutional credibility. That erosion won’t be fixed overnight. Investors need to recognise that this is now a dollar story—and not a favourable one.
Nigel Green is deVere CEO and Founder
Also published on Medium.
