After peaking above 114 in September 2022, the dollar index has spent the last several years drifting lower, touching 96 a few weeks ago before stabilizing at 97.68 as we write. Much of that move has stemmed from weakness relative to the euro specifically. When “everyone” was a dollar bull in 2022, Europe’s common currency briefly traded below parity with the dollar; today it is $1.18.
The dollar’s experience with the yen in recent years has been different; that country’s central bank seems ok with an orderly weakening of its currency. At ¥154 to the dollar, the yen’s range over the last year or so has been akin to its exchange rate as far back as 1990. In those days, Japan was about to embark on several years of disinflation, an occurrence that witnessed the yen generally in strengthening mode clear to 2012.
Dollar bears abound. The February BofA Fund Managers Survey showed the dollar, tech stocks and US equities having the largest month-over-month declines in investor positioning. Additionally, the degree by which the most recent survey showed investors positioned bearishly on the dollar reached a new record, having tallied “Bull-Bear positioning” since 2012.
Should the dollar catch a relief rally, it may also give some oxygen to software companies, who have been correlating with the troubled greenback in recent weeks. It could also cool gold’s ascent, though the metal has spent large chunks of this cycle running higher even during periods of dollar strength. But importantly, a dollar rally would adversely hit the translation effect of unhedged foreign equity mandates.
Granted, the dollar bears have strong arguments. For one, the Congressional Budget Office (CBO) anticipates the federal budget deficit-to-GDP ratio will be 5.8% this year.
But everything is relative. Take Germany, which has a reputation as the most responsible government in the eurozone. In contrast to years of the notorious “Black Zero,” when it was the country’s official policy to target a balanced budget, that country’s defense spending blowout is also causing deficits as far as the eye can see. Goldman Sachs projects Germany will run a deficit of 3.7% this year and 3.9% in 2027, the “highest deficits outside of a recession in decades.”
None of this is unique to Germany or Europe in general. With Japan’s prime minister Sanae Takaichi also embarking on a program of expansionary fiscal policy, Fitch anticipates the country’s fiscal deficit will rise “towards 3.7% of GDP by fiscal 2027,” up from 2.4% in fiscal 2025. Critically, in its January report, Fitch anticipated Japan’s economic growth will continue to rise faster than its debt build-up, sending the country’s government debt-to-GDP ratio to the mid-190% area for fiscal 2029, down from a peak of 222% in 2020.
If Japan can continue to pull off an ever-declining debt-to-GDP ratio, it would partially eliminate one of the primary bear cases for global risk assets: that someday, its bond market would blow up, sending the global economic order into a tailspin. If that’s the case, wouldn’t rising US debt burdens become the new rationale for being worried about the S&P 500 and/or the dollar?
Well, much like the situation in Japan, we think most seers do not realize that the US debt burden relative to the size of its economy also peaked in 2020. In that year’s second quarter, the ratio popped above 132%. In Q3/2025, the most recently reported quarter, the debt-to-GDP ratio clocked in eleven percentage points lower, at 121%. We simply don’t think the overwhelming majority of people have any idea that both Japan and the US are witnessing these debt-to-GDP declines.
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