The Great Debasement: Structural dollar weakness
For centuries, currency stability was regarded as a core attribute of statehood: those who abused their minting rights lost trust and power. Henry VIII provided an early lesson in this regard: in order to finance his wars and court expenses, he systematically reduced the sterling silver content of English coins from 1545 onwards. In nominal terms, the value remained the same, but in real terms it fell dramatically. This "Great Debasement" was nothing more than a hidden tax on savings, paid by those who had trusted in the integrity of the king.
The final break with precious metal backing finally came in the modern era: in 1971, President Nixon suspended the convertibility of the US dollar into gold because gold reserves were no longer sufficient in relation to the growing money supply. With the gold anchor breaking away, the system of fixed exchange rates established at the Bretton Woods Conference in 1944 collapsed.
The US dollar's role as the world's leading and reserve currency continues to this day, supported by the sheer size of the economy, high productivity, and stable institutional frameworks. However, stress factors are becoming increasingly prevalent: persistent trade deficits, high public debt combined with a structural budget deficit, and growing fiscal dominance over monetary policy are putting the dollar's long-term value stability into question. The only silver lining is the lack of alternatives among major fiat currencies that are not burdened by similar developments.
This environment of global debt monetization speaks against aligning portfolios towards lower "nominal" risk. Instead, the focus must be on safeguarding real purchasing power. Real value anchors such as gold and Swiss real estate, as well as global quality equities with solid earnings power make an important contribution to long-term value preservation. What matters is robust diversification oriented toward stability, quality, and real purchasing power protection. The following overview shows what concrete conclusions this implies for current portfolio positioning.
Allocation: Balanced positioning amid stable fundamentals
The macroeconomic environment remains robust. Growth in major economies is moderate with no significant recession risks in sight. Expansionary fiscal policies in the US and Europe provide additional support. Although labour markets are gradually cooling, this reflects an orderly late-cycle adjustment rather than a noticeable weakening of overall demand. Inflation is slightly above target with limited shortterm pressure. The Federal Reserve is increasingly focusing on labour markets, signalling a shift toward monetary easing.
Against this backdrop we maintain a neutral equity weighting. Fiscal and monetary impulses are stabilizing but elevated valuations and persistent uncertainty justify a balanced stance. At the sector level, we are pursuing a more balanced allocation and therefore reducing our overweight in consumer staples. The freed-up funds are being redirected into the industrials sector, which offers more cyclical exposure at reasonable valuations. Bonds remain underweighted as persistently high fiscal deficits exert upward pressure on yields. Gold and Swiss real estate remain overweight. Both asset classes convincingly fulfil their role as real assets and offer attractive characteristics in the current environment.
The era of a strong dollar is ending
Nach einer massiven Rally seit Mitte 2014 lag der reale, handelsgewichtete Dollar-Wechselkurs (REER) – ein inflationsbereinigter Index, der den DAfter a massive rally since mid-2014, the real, tradeweighted dollar exchange rate (REER) stood at the end of 2024 above its level at the start of the millennium. The REER is an inflation-adjusted index measuring the dollar against a basket of US trading-partner currencies. Back then, dollar strength was driven mainly by robust economic growth and a rare phase of fiscal discipline with budget surpluses. The appreciation since 2014 has essentially been due to: (i) a deflationary equilibrium in Japan and the Euro area, forcing the ECB and BoJ into aggressive monetary easing; (ii) the fracking boom, which made the US one of the world's major oil producers; and (iii) more than 15 years of superior US productivity growth.
Following Donald Trump's election, there was broad consensus among economists and investors, that the dollar would remain strong or strengthen further due to tariff policies. The dollar index peaked on January 12, exactly one week before Trump's inauguration. Initial "sell-the-news" profit-taking intensified with the "Liberation Day" shock: the announcement of broad import tariffs triggered a small crash. By year-end, the dollar had lost about 10%. Even after this correction, the REER remains almost two standard deviations above its 30- year average. These are levels that historically have often been followed by multi-year depreciation phases.
US productivity advantages, now reinforced by leadership in artificial intelligence, still support the dollar. The trade deficit has also shown signs of easing after initial pre-tariff "hoarding imports". At minus $30 billion, October recorded the smallest monthly deficit since the 2009 financial crisis. But even under optimistic assumptions, the US will not be able to reverse the deficit and will remain dependent on export nations that recycle their surpluses in USD. These flows are at risk as Trump's policy of "shock and awe" has caused a great deal of damage.
Moreover, his continuous testing of domestic boundaries shows, that the institutions in the world's oldest democracy are formally less tightly safeguarded and rely more heavily on adherence to norms. Even the Federal Reserve's independence is being questioned, further undermining the dollar's reserve-currency status.
Not only is the economy dependent on foreign capital, but so is the US government, whose gross debt stands at around USD 38.4 trillion (130% of GDP). Public debt (excluding intragovernmental holdings) amounts to around USD 30.8 trillion (100% of GDP). One third of this is held by foreign investors, in particular central banks and sovereign wealth funds. According to CBO estimates, gross debt could rise to almost 200% of GDP by the middle of the century.
Fiscal policy excesses began even before Covid: during Trump's first term with generous tax cuts, and they continued under Biden with large industrial subsidy packages. Trump's "One Big Beautiful Bill Act", which combines industrial policy, infrastructure, defence, deregulation, and permanent tax cuts, now definitively marks the point at which deficit spending is no longer a crisis response but becomes a permanent feature of economic policy planning. The alleged counter-financing is only of limited use: the "DOGE"-savings agenda led by Elon Musk turned out to be more of a marketing campaign, and additional revenue from customs duties only covers a fraction of the additional costs of "OBBB".
Debt sustainability as a monetary policy constraint
A country with high and rising debt cannot sustain significantly positive real interest rates in the long term. Even without increased political pressure, the Fed will be forced to bow to fiscal realities for reasons of financial stability, tolerate higher structural inflation and maintain an expansionary monetary policy. Following the interest rate cut at the December FOMC meeting, the key rate remains above the 3% inflation rate at 3.75%. This means that the real interest rate is still slightly positive. However, the change in balance sheet policy was noteworthy: following the previously announced end of quantitative tightening, i.e. the reduction of the Fed's bloated balance sheet through maturing or nonreinvested securities, the Fed immediately switched back to expansion.
The SOFR–EFFR spread, the difference between the repo rate and the effective Fed Funds Rate, rose unusually sharply in the fourth quarter. This indicates tight liquidity or an oversupply of short-term government bonds. The Fed is now buying back precisely these T-bills. As these are money market securities, this is considered neither quantitative easing nor yield curve control.
However, the effect is limited: the Treasury can also influence the yield curve via the maturity structure of its issues by reducing the supply of longer-term bonds. In 2025, 70% of debt was already issued in the form of T-bills. This share is likely to rise further, as refinancing at the short end is currently the cheapest. Since the Fed began its cycle of rate cuts in early 2024, longer-term interest rates have risen significantly – an indication that investors are demanding a higher risk or term premium for US government debt.
Japan provides a possible blueprint for the future of the dollar: the expansionary fiscal policy pursued by Prime Minister Shinzo Abe since 2013 has been accompanied by very low, sometimes negative real interest rates and massive bond purchases by the BoJ. It now holds almost 50% of the enormous national debt of around 240% of GDP. "Abenomics" has left deep marks on the yen. The fact that, unlike in the US, the liabilities are primarily held domestically dampened the currency's collapse but also caused Japanese savers to suffer a drastic loss of purchasing power. After around ten years, the policy finally had an impact on inflation figures. While the major central banks began cutting interest rates from 2024 onwards, the BoJ had to raise key interest rates slightly and adjust its yield curve control – with painful losses on long-term bonds.
Not all is lost for the the dollar as there are simply no alternatives today. Confidence in the debt sustainability of the eurozone countries has been severely shaken. Long-term interest rates on French and German government bonds have risen even more sharply than in the US since the beginning of 2024, despite the ECB's more decisive interest rate cuts. Although government debt in the eurozone is lower than in the US at 88% of GDP, this comparison ignores the unfunded pension liabilities in Europe. Pension assets in the US amount to around USD 50 trillion, while in the eurozone they total a mere EUR 3 trillion. In Germany and France in particular, unfunded schemes are coming under strain as the baby boomers reach retirement age. Social security contributions, already at a high level, are no longer sufficient to finance pension payments and the shortfall must be made up by tax revenue. Rising defence and infrastructure spending are placing an additional strain on the budget. According to IMF estimates, the structural primary deficit, i.e. the budget deficit before debt servicing, will be around -1.5% in the eurozone in the coming years. This is only marginally better than in the US and does not include Germany's "special funds".
Scope for additional revenue is limited: the public expenditure ratio, i.e. the sum of taxes and social security contributions as a percentage of GDP, is 41% in the eurozone, compared with 26% in the US. Labour in particular is subject to such high taxes that Europe is losing its competitive edge. This is particularly precarious because European industry often competes directly with Chinese excess capacity. This puts pressure on Europe's most important advantage: its positive foreign trade balance.
The bottom line is that the Americans lack the will to consolidate their budgets, while the Europeans lack the means.
Wealth preservation amid structural currency debasement
In this environment, the Swiss franc appears to be the gold standard among fiat currencies. This special status is supported by stable institutions, sound public finances, a moderate public spending ratio, a structural foreign trade surplus and a long tradition of price stability. At present, the high interest rate differentials, which make hedging the US dollar and the euro costly, are preventing a stronger appreciation of the franc. However, if the ECB and the Fed lower interest rates further, the SNB will have little room to counter this. Following the prudent balance sheet reduction during the high inflation phase, there would be room for currency intervention again, but this would be a balancing act because Washington has the SNB in its sights as a currency manipulator.
In the context of structural currency devaluation, real value anchors are becoming increasingly important for Swiss investors. Gold plays a vital role in this regard. As an asset with no counterparty risk, it serves less to optimise shortterm returns than to hedge against monetary devaluation and loss of confidence in fiat currencies. Swiss real estate complements this function as a real store of value in a stable institutional environment. Real estate funds and companies are the only liquid asset class in the real value sector that is not affected by the appreciation of the Swiss franc.
This does not apply to the Swiss stock market. Hardly any Swiss companies are immune to currency fluctuations, which have a disproportionate impact on profits given the high domestic cost base. The key is to focus on quality and cost structure. Investments in internationally active largecap companies with a strong market position, high pricing power, robust margins and broadly diversified revenue sources offer a natural currency hedge. Cash flows generated in different currency areas and flexible cost structures have a stabilising effect.
US equities remain indispensable despite the weakness of the dollar. Its innovative strength in technology and biotechnology is unrivalled, and it is only possible to invest in key future sectors such as artificial intelligence and gene therapy to this extent there. However, the dollar's structural weakness increases the required returns, which must be able to compensate for the currency-related headwinds. This is achievable for companies with exceptional growth rates, dominant market positions and robust profit margins.
For fixed-income investments, currency risks are structurally more pronounced, favouring a cautious stance toward foreign bonds even when hedged. High-quality Swiss corporate bonds mainly provide portfolio stabilization rather than meaningful real returns.
The depreciation of major fiat currencies is structural and likely to persist. For Swiss investors, the key to wealth preservation lies not in tactical currency management, but in consistent alignment toward quality, real value anchors, and robust earnings sources.
Authors:
Rui Ramires, CFA
Marius Baumann, CFA
Disclaimer
The prices used in our analysis are end-of-period prices. The figures used for our valuation model are estimates referring to dates and therefore carry a risk. These are liable to change without notice. The usage of valuation models does not rule out the risk that fair valuations over a specific investment period cannot be attained. A complex multitude of factors influences price developments. Unforeseeable changes could, for instance, arise from technological innovations, general economic activities, exchange-rate fluctuations or changes in social values. This discussion of valuation methods makes no claim to be complete. Dreyfus Sons & Co Ltd publishes Compass four times a year since June 2008. The publication is aimed at clients of the bank and interested parties. It describes some of the instruments and methods the bank uses to monitor everything to do with the financial markets. A description of the investment process can be obtained from your client advisers or our website. Compass provides guidance but cannot take the circumstances of an individual portfolio into account. It is for information and marketing purposes.