The Almighty Dollar: A 100-Year History of America’s Most Powerful Export

I remember a time when the yen would strengthen on risk-off days. Just before Abenomics and QQE the yen was the only safe haven. I also remember a few times when the Euro was the safe haven.

The USD is about 50% of global reserves, down from about 70% once upon a time.

The recent USD strength is probably more about a shortage of USD because trade is down, and a repatriation of USD from global investments in a time of war, which I guess could be construed as a flight to safety.

That is a very impressive synopsis and from it the question is begged what "safety" actually means. In the case of a carry trade unwind, are traders repatriating funds back to the funding country or are they seeking safety, or is it just two ways of stating the same thing?

In my mind "safe" conjures up ideas like: stable, predictable, consistent, reliable which are not adjectives I could apply to the USD after 3 ratings agency downgrades for debt exceeding 120% of GDP and seemingly no desire nor plan to address it, a 6-time bankrupt erratic president with on and off tariffs who stated a debt default "could maybe mean nothing" and openly admitted to manipulating the market "like a yo-yo", and the US government habitually weaponizing the USD to force other countries into compliance. It seems not only is the USD not safe, but quite dangerous to be manacled to it, or for that matter: any one currency. It may be prudent not to make big fanfare about it but quietly tiptoe out the back.

I think it's a mistake to conclude no other currency is big enough to replace the USD because it overlooks the fact that the rest of the world collectively is bigger. Similar to elections where one candidates get 40% of the vote and the others 30%, 20%, 10%, then the winner with 40% actually had more votes against them than for. We're quickly approaching a day when more reserves are not-USD than USD.

My point is less about what the USD is and more about where it's trending, and the trend is down in terms of faith and necessity. For instance, now that JGBs pay interest there is no need to invest in the US for a good return. Currently, money is in the US but there is increasing incentive for it to not be.

But the bottom line isn't what is real but perceptions: if people continue to regard the USD as a safe haven then whether it actually is or not is irrelevant. Hence the dash for trash.

And if inflation continues to tick up and the fed doesn't raise rates to offset it (ie raise the real rate) because they fear unemployment and a funding crisis then it's USD bearish. The whole "fed not cutting" fear goes out the window and is replaced with the "fed not hiking" to halt currency depreciation. If we get an AI bubble pop forcing the fed to slam rates in spite of inflation then look out below.

The USD can hardly be considered safety anymore. It's getting more like a dash for trash.

It’s a viewpoint that’s gaining traction in some circles. That said, the USD still accounts for the majority of global reserves and trade settlement, and historically it tends to strengthen during periods of global stress—one of the key characteristics of a safe-haven asset.

Excellent historical framing — and you're touching on something deeper than most commentators acknowledge. The rotation of safe-haven status between the yen, euro, and dollar isn't arbitrary; it tracks carry-trade dynamics and net foreign asset positions. The yen strengthened pre-Abenomics precisely because it was a low-yielding funding currency — risk-off events triggered carry unwinds, sending JPY sharply higher. The ECB's rate policies created similar mechanics for the euro at certain windows.

On USD reserve share: you're right that it has declined from peak levels, but the current IMF COFER data still places the dollar at approximately 57–58% of global reserves — structurally dominant, even if gradually eroding. Goldman Sachs and J.P. Morgan research both characterize 2026's de-dollarization narrative as more cyclical than structural. The dollar still sits on one side of roughly 89% of all global FX trades (BIS, 2025) — no alternative currency comes close in liquidity or transactional infrastructure.

Your point about USD shortage during trade contraction is technically precise and often underappreciated. The dollar's current strength isn't purely a flight-to-safety narrative in the traditional sense — research from CEPR actually shows the dollar only appreciates *persistently* during episodes of global funding stress, not ordinary risk-off events. What we're seeing now fits that framework: the US-Israel-Iran conflict has spiked oil prices, reignited inflation fears, and pushed back Fed rate cut expectations to September–October 2026. The DXY has climbed to near 98–99, a five-week high, driven by safe-haven demand *compounded* by energy inflation pressuring oil-importing economies (especially Europe and Asia).

The forward path for USD remains contested but directionally volatile: Morgan Stanley projects a dip toward 94 in Q2 before a H2 rebound, while Goldman flags that the 'dollar smile' framework — where USD strengthens in both high-growth and high-stress environments — may have flattened. Structural headwinds are real: fiscal deficit expansion, rising Treasury issuance, and the CNY's growing share in trade finance (now at 8.3% of SWIFT trade finance, quadrupled in four years). But none of these displace the dollar in any near-term horizon.

Bottom line: your "USD shortage + repatriation" thesis holds up technically — it aligns with funding stress mechanics. The question for 2026 is whether geopolitical risk premium extends this strength or whether Fed easing ultimately breaks it into year-end.