Dollar: As Real Yields Fall, Exposure Normalizes — BNY

As the support from real yields to the dollar weakened following the Fed's July meeting, international investors are reassessing their dollar asset allocations. BNY strategist Geoff Yu noted that the recent decline in the dollar index reflects more of a normalization of previously extreme positioning in U.S. assets than the "U.S. exceptionalism" unwind the market fears. The dollar index was trading near 99.41 at press time, extending its recent correction.

**Positioning adjustment drives dollar weakness**

According to BNY's observation, international investors' exposure to U.S. assets had reached extreme levels, and the current pullback is essentially a repositioning. The bank believes that overseas investors' allocation to U.S. assets was previously broadly underweight, and with the U.S. economy expected to lead growth in 2026, capital flows may return — but investors will manage currency exposure more actively. This implies the dollar's weakness is not a trend reversal, but rather a shift from extreme to neutral positioning.

**Divergent asset performance**

During the dollar's adjustment, different asset classes have shown notable divergence. BNY emphasized that U.S. equities remain supported by fundamentals, with corporate earnings and economic resilience providing a buffer for equity assets. In contrast, fixed income has exhibited stronger defensive characteristics, as investor concerns over duration risk and the fiscal outlook weigh on bonds. This divergence suggests that currency risk varies by pair and cannot be summarized simply by the dollar index's one-way movement.

**Dollar's role in a multipolar world**

Over a longer horizon, BNY's 2026 outlook argues that as the global balance of power shifts toward multipolarity, the dollar's safe-haven status has somewhat diminished, and a landscape with multiple reserve currencies may emerge. The bank expects investors to hedge dollar exposure more frequently while adopting active currency management when increasing U.S. asset holdings. This view aligns with the current short-term trend of dollar positioning normalization, implying that while the dollar faces structural challenges, the appeal of U.S. assets has not been fundamentally undermined.