Cyclical or structural weakness?

THE US dollar looks set to stay on the back foot through the rest of the year, with more selling pressure likely to build as hedging costs fall and global growth broadens out.

Investors brace for further weakness, but the bigger question is whether this is the start of something structural or simply another turn in the cycle.

According to analysis from ING Group, the answer leans firmly towards the latter.

The multinational banking group says: “The prevailing narrative is that this is part of some structural loss of confidence in the dollar, if not in US asset markets. While we acknowledge some decades-old gradual de-dollarisation trends, our view is that the 2026 US dollar decline will be more cyclical than structural.”

That may come as a surprise given the chatter around a weakening greenback. Yet, by longer-term measures, the currency still sits at elevated levels.

ING points to the US Federal Reserve’s (Fed) trade-weighted dollar index against 26 trading partners and notes that last year’s sell-off has barely dented a rally of around 45% since 2011.

“In short, the dollar is not particularly weak and could fall a lot further should it be warranted,” the bank says.

One key driver this year is currency hedging. When global investors buy US assets, they often hedge the US dollar exposure. The cost of doing so matters.

ING argues that high hedging costs had previously kept hedge ratios low, especially in euro-US dollar positions.

Data from Denmark’s central bank shows local pension funds and asset managers ended last year with a 72% hedge ratio.

ING’s baseline assumes that a 50 basis point Fed rate cut versus unchanged European Central Bank policy will narrow hedging costs further, lifting hedge ratios to around 74% by year-end.

“In other words, more US dollar selling will be coming through,” it says.

A jump towards 80%-82% would require “a much greater loss of confidence in the dollar”.

Safe-haven status

The US dollar’s safe-haven status has also softened. ING measures this by looking at the correlation between the Bloomberg dollar index, US equities and 10-year Treasury yields.

“The dollar has lost some, but not all, of its safe-haven value,” the bank says.

The three-month correlation with the S&P 500 stands at minus 0.25, still negative but less so than in the past. Correlations, it adds, tend to be cyclical, and there have been many episodes where the US dollar temporarily loses its defensive appeal.

Despite the weaker tone, foreign investors are not heading for the exit. Private investors, who account for more than 80% of foreign holdings of US securities, have in fact increased their net purchases from an average US$1 trillion per year in 2022–2024 to US$1.5 trillion in 2025.

Foreign ownership of the total US securities market reached an estimated 20.2% as of September 2025, the highest level in roughly a decade.

“Unless a major offloading in the foreign holdings of US assets takes place, the weakness in the US dollar would appear more cyclical,” ING says.

Official investors, such as central banks and sovereign funds, have kept their US dollar positions broadly flat since 2020. That is cautious, but not an aggressive retreat.

Even China’s selling has limited impact so far

China and Hong Kong together hold around US$1.8 trillion of US securities, roughly 5% of all foreign holdings. Annual net sales rose from US$36bil in 2023 to US$145bil in 2025, yet Europe remains the bigger swing factor. European investors hold US$17.1 trillion, or 47% of foreign holdings, and have steadily increased their purchases, more than offsetting China’s reductions.

De-dollarisation move?

On the broader theme of de-dollarisation, ING sees little evidence of acceleration.

Across global assets, liabilities and foreign exchange turnover, there is no broad deterioration in the US dollar’s role since 2024.

The International Monetary Fund’s Currency Composition of Official Foreign Exchange Reserves data show the dollar accounting for 56.9% of global reserves in the third quarter of 2025, slightly higher than the foreign-exchange-adjusted level at the end of 2024.

The US dollar’s share of over-the-counter foreign exchange turnover stood at 86.8% by mid-2025.

ING says the rise in the US dollar’s share in several metrics is not consistent with the claim that last year’s weakness reflected a fundamental loss in confidence in the greenback.

A softer US dollar does not automatically mean a souring US outlook.

ING frames US exceptionalism as a “two-sided coin”, reflecting both US strength and opportunities elsewhere.

As the global economy stabilises and expands in a more synchronised way, portfolio flows are shifting into emerging markets.

Strong cumulative inflows into major emerging market equity exchange-traded funds accompany the dollar’s slide.

“It’s not that the US outlook is deteriorating. It’s just that, for the first time in a long time, there are some more attractive opportunities overseas,” the bank says.

For bond investors, signs of waning foreign demand would show up in technical indicators rather than headlines.

ING highlights widening swap spreads, sharp steepening in the five-to-10 or five-to-30-year Treasury curve, a collapse in so-called indirect bids at auctions, and deterioration in market liquidity such as wider bid-offer spreads.

Absent those signals, the case for a disorderly sell-off remains thin.

Bearish on the greenback

What could change the picture is policy credibility.

ING says it does not expect European investors to dump US assets without clear economic reasons.

But it flags the independence of the Fed as critical. If rate cuts were seen as inappropriate and US real interest rates turned negative, confidence could erode more fundamentally.

Fiscal risks also loom, especially if persistent deficits combine with heavier Treasury issuance and weaker foreign participation.

For now, ING sticks with a cyclical bearish view.

It expects two Fed cuts this year, softer US growth in the second half and firmer eurozone data. It argues that while this year’s decline may not match 2025’s in scale, the balance of risks still points lower for the greenback.