David Rosenberg, a prominent economist and the founder and president of Rosenberg Research, recently issued a warning that the current pressures facing the US dollar have transcended conventional cyclical fluctuations, sliding instead into a long-term bear market with structural characteristics. Unlike the market's simplistic bets on Federal Reserve rate cuts, Rosenberg emphasizes that the core driver of this trend is the continuous erosion of global investors' trust in the fiscal, trade, diplomatic, and overall policy coordination capabilities of the United States.
Historically, since the collapse of the Bretton Woods system in 1971, the US dollar has experienced at least 15 downward cycles with declines exceeding 10%. However, the current situation is far more complex, as internal policy chaos in the US is accelerating the erosion of global confidence. On one hand, the White House is attempting to quell domestic concerns over the cost of living ahead of the midterm elections; on the other hand, it is reigniting trade friction with core trading partners and even maintaining a tough naval blockade regarding Iran, continuously escalating geopolitical risks and energy prices. On the monetary policy front, there are severe divisions within the Federal Reserve over whether to continue tightening policy, with some policymakers advocating for further rate hikes. This is highly prone to causing policy misjudgments given the mismatch between potential economic growth and actual demand. Meanwhile, the Treasury Department's attempt to suppress long-end yields by expanding US Treasury buybacks creates a subtle tension with the central bank's emphasis on monetary discipline.
This inconsistency at the policy level directly strikes at the structural vulnerabilities of the US economy. Currently, the US personal savings rate has fallen to a low of around 3%, while the fiscal deficit accounts for over 6% of GDP. Meanwhile, the AI boom has spurred massive corporate capital expenditures, further draining domestic liquidity. With the net national savings rate hovering near zero, government deficits and corporate investment are heavily reliant on foreign capital to fill the gap. This raises a critical question: when foreign investors demand a higher risk premium, will the US attract capital with high interest rates, or will it allow the dollar to depreciate to find a new equilibrium?
Micro-level data from the capital markets have already provided partial answers. Rosenberg focuses on the US Treasury market, pointing out a significant reversal in the behavior of foreign central banks. By the middle of this year, foreign official institutions shifted from net purchases of approximately 100 billion US dollars in Treasuries over the past year to net sales of the same scale, representing a drastic reversal of 200 billion dollars in capital flows. Given that the US current account deficit accounts for about 3% of the economy, this contraction in net foreign capital inflows implies that the dollar's past model of relying on capital account surpluses to offset trade deficits is facing severe challenges.
The reason long-term US Treasury yields remain stubbornly high is not simply due to out-of-control inflation, but rather the combined effect of fluctuating trade policies, geopolitical conflicts, and AI financing needs, all of which have pushed up the risk premium. To support massive investments in computing power and infrastructure, corporations are engaged in fierce competition with the federal government for capital in the bond market. Rosenberg suggests that to truly alleviate upward pressure on interest rates, the White House needs to present a more credible fiscal consolidation plan and quell external geopolitical conflicts. For instance, the proposed 50% tariff on Canadian auto exports would not only drive up domestic prices but also disrupt the North American supply chain. Simply intervening in the bond market or conducting exchange rate operations is not a fundamental cure.
Against the backdrop of a declining trust premium for the US dollar, global central banks are accelerating the diversification of their reserve assets, with their gold purchases accounting for about a third of the world's annual mineral supply. While this will not immediately overturn the dollar's hegemonic status, combined with the selling of US Treasuries by foreign central banks, it is sufficient to indicate that the era of unconditional trust in dollar assets is loosening. From a valuation perspective, the euro and the yen are undervalued by about 10% and over 30%, respectively, and together they account for approximately 70% of the weight in the US Dollar Index. As the US may fall into a two-year fiscal gridlock following the midterm elections, narrowing interest rate differentials will prompt funds to reassess these undervalued non-US dollar assets.
Rosenberg does not subscribe to the extreme theory of a dollar collapse, but he emphasizes that the erosion of confidence, intertwined with fiscal deficits, trade conflicts, diplomatic frictions, and debt management disputes, is subjecting the dollar to a prolonged and profound bear market cycle. Historical experience since 1971 shows that the status of a global reserve currency cannot grant the dollar permanent immunity against downward cycles, and investors are now tangibly feeling the return of this cyclical force.
