Why fears of dollar debasement appear premature despite the recent hype

Concerns that the U.S. dollar is heading into a phase of rapid debasement look exaggerated, despite ongoing longer-term headwinds. Although the currency has been volatile recently and briefly hit multi-year lows—reviving “Sell America” narratives—Bank of America says market evidence does not yet point to a structural shift away from U.S. assets.

While BofA remains bearish on the dollar over the long run, it expects any depreciation to play out gradually through 2026 and 2027 rather than through an abrupt decline. Investor positioning and capital flow data show little sign of a coordinated move out of U.S. assets. Dollar risk premia have risen only modestly, and options markets indicate that short-dollar positioning is not meaningfully larger than it was three months ago.

Cross-asset flows reinforce this view, with equity and bond data showing no substantial foreign capital flight from the U.S. Notably, there has been just one session this year in which both the dollar and U.S. equities sold off sharply at the same time—an outcome inconsistent with a broad debasement scenario.

Instead, BofA suggests that increased currency hedging is the more likely adjustment. European investors may hedge their U.S. exposure more actively, which could place steady, incremental pressure on the dollar without triggering a disorderly selloff.

Macro indicators also fail to signal rising debasement risks. Inflation expectations remain well anchored, and although fiscal concerns are widely discussed, they have not produced market stress indicative of eroding confidence in the dollar. Part of the expected dollar weakness may simply reflect improving conditions elsewhere, particularly in Europe, where stronger growth prospects, German fiscal stimulus, potential spillovers from Chinese stimulus, and longer-term structural factors such as higher defense spending and trade agreements could support the euro and other non-U.S. assets.

Sources: Pratyush Thakur