The Long-Awaited Dollar Correction Finally Commencing_banner

After years of dollar outperformance, the turn has finally come. In this note, Stephen Jen and Joana Freire revisit their long-standing bearish view on the dollar and explain why the correction now underway is both justified and overdue.

The authors identify a convergence of structural and cyclical forces weighing on the greenback: overvaluation, trade imbalances, eroded manufacturing competitiveness, and the waning premium of “American Exceptionalism.” They challenge the still-lingering consensus view that tariffs support the dollar and highlight the fragility introduced by a USD25 trillion net foreign liability position.

They also clarify that this dollar weakness is not a signal of lost dominance. Rather, it's a necessary realignment from the inflated “shadow price” driven by capital market flows toward a level more consistent with economic fundamentals. Their base case: a multi-year correction taking EURUSD to 1.25 and USDJPY to 125 by end-2026.


Key Quote

“The spot dollar exchange rate has to now move from the higher asset market shadow price to the lower real economy shadow price.”


Table of Contents

  • Bottom line

  • Triffin, fiscal stimulus, and productivity premium

  • Loss of US competitiveness in manufacturing

  • Fighting the ‘twin deficits’

  • Dollar over-valuation

  • The Trade War and the Dollar Smile

  • Repatriation risks out of USD assets rising sharply

  • Bottom line

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ESLJ-150425-R1

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