The U.S. Dollar: The Different Stages of a Breakup
By: Jayati Bharadwaj
Jul. 25, 2025 - 3 minutes 30 seconds
Overview:
- The USD collapse started in high gear but — in its current stage — appears to have steadied its decline.
- The U.S. economy has relied on foreign ownership of stocks and equities, particularly from Canada.
- Repatriation and divestment away from U.S. assets could result in further downward pressure, bringing the USD to a more level playing field with its peers.
The stages of the U.S. Dollar (USD) breakup.
The first stage in Q1 2025 was fast and furious as we saw a rapid sentiment and positioning adjustment. The second and most recent leg lower has been slow paced but consistent as the dollar seems to have come to an acceptance of its fate. We explore which stage will come next.
The U.S. has relied on the kindness of strangers
The US economy relies on the savings of foreigners given the low domestic savings rate. The USD's overvaluation has dovetailed with the rise in foreign ownership of U.S. equities. These positive capital flows have allowed the U.S. to support the current account deficit.
Record highs in foreign ownership of U.S. stocks
Net foreign ownership of U.S. equities (TIC data), % of global equity market cap
Have you been hedging your bets?
Until recently, leaving foreign FX exposure unhedged favored ex-U.S. investors and penalized U.S. investors. We entered 2025 with a high allocation of global portfolios to U.S. assets. However, the USD hedging ratios were low. Moving ahead, investors can no longer rely on the USD being a natural hedge to their U.S. portfolio holdings and need to hedge their exposure now.
Canada case study: Who owns the U.S. equity pie, and is it adequately hedged? Canada is the largest holder of U.S. equities. We examined the financial statements of pension funds and found that hedging ratios remain low (averaging 10%–15%) and have fallen over the last few years.
Which countries hold the most U.S. equities?
Portfolio holdings of U.S. corp stocks by country, $ trillion
What comes next?
We see another 4% move lower in the USD in H2 2025, but that will not be as rapid as we saw in Q1. In Q3 2025, the USD could be in a tussle between structural downward pressure and stretched technicals wanting to see a popup higher. This, in a backdrop of increased data dependence, lingering risks to inflation and geopolitical tensions might see the USD swing back and forth.
Leveling the playing field
While investors will increase hedge ratios in the second stage, the third stage is where repatriation and a divestment away from U.S. assets provide further downward pressure to the USD. We see nascent signs of that and are watchful of those outflows being sustained. The USD will likely be brought to a more level playing field with its peers, reflecting a convergence with the rest of world.
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