US Dollar Weakening as Central Banks Diversify Reserves

The thesis that the US dollar is structurally weakening as central banks diversify reserves is well-supported by current data and consensus among major financial institutions. The DXY fell 10.7% in H1 2025 — its worst first-half performance in over 50 years — and currently trades around 97.6, down 8.2% over the past 12 months. Key drivers include persistent US fiscal deficits (FY2025 deficit at 5.9% of GDP, with federal debt reaching 99.8% of GDP), Fed rate cuts narrowing interest rate differentials, and shifting global capital flows. The IMF's Q3 2025 COFER data shows the dollar's share of global reserves at 56.92%, continuing a long decline from 72% in 2001. Central bank gold purchases have averaged 1,045 tonnes annually over the past three years — a 221% increase over pre-2022 levels — with China, Poland, Turkey, and India leading diversification efforts. BRICS nations now settle over 85% of mutual trade in local currencies, up from 65% in late 2024, though full de-dollarization remains unlikely given structural supports for dollar dominance. The investment implications are significant across asset classes. International and emerging market equities have been major beneficiaries: the MSCI EM Index surged 33% in USD terms through October 2025, nearly double the S&P 500's return, while global non-US equities outperformed US equities by 13.9 percentage points in dollar terms. EM local currency sovereign bonds returned 13.8% in USD terms (JPM GBI-EM Index), with 6.2% from currency appreciation alone. Goldman Sachs forecasts EM company earnings growth of 14% in 2026, and multiple asset managers (Cambridge Associates, AllianceBernstein, Schwab) recommend overweighting non-US equities. Commodities, particularly gold, have been the clearest beneficiary — prices surpassed $4,000/oz in 2025 with a 42% annual gain, and J.P. Morgan forecasts $5,055/oz by Q4 2026. Copper also benefits from dollar weakness alongside structural AI/energy transition demand. From a fixed income perspective, the US Treasury yield curve is expected to steepen in 2026, with 10-year yields ranging 3.75%-4.50% as massive fiscal deficits ($1.9T projected for FY2026) keep long-term yields elevated despite Fed easing. EM local currency debt offers compelling value with yields above 7% and significant undervaluation versus the dollar. Corporate credit spreads are historically tight (IG at 78bps, HY at 270bps) but the weak dollar environment and rate cuts support credit quality broadly. The consensus view from Morgan Stanley, Goldman Sachs, ABN AMRO, and MUFG points to continued gradual dollar depreciation through 2026, with DXY likely ending in the low-to-mid 90s, though sharp counter-rallies remain possible during risk-off episodes given the dollar's enduring safe-haven status.