Muzinich Weekly Market Comment: A brief history of the US dollar
Insight
May 11, 2026
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Markets remain in risk-on mode, but recent US dollar weakness is prompting a closer look at its role in the global system. This week, we revisit the history of the dollar to understand what may lie ahead.
May has picked up where April left off, with price action continuing to favour risk. Our preferred sentiment gauge, the VIX, continues to drift lower, signalling that investor confidence is steadily returning. US government yields have remained relatively stable, trading in a tight range as robust economic data and limited signs of inflation pass-through into employment continue to offset one another. In contrast, European government debt continues to modestly outperform, with curves bull-flattening, as soft economic data and the ongoing fragile Middle East ceasefire push investors to pare back worst-case scenarios around central bank tightening.
On the peace process, progress continues in the familiar pattern of two steps forward, one step back. It was a step forward last week after it was reported that the US and Iran are close to agreeing on a one-page memorandum of understanding that could end the war and establish a framework for more detailed nuclear negotiations. Its reported provisions include a moratorium on Iranian nuclear enrichment, with the US in return lifting sanctions and releasing billions in frozen Iranian funds, along with both sides easing restrictions around the Strait of Hormuz. The White House has indicated it believes a formal agreement is now within reach.
Corporate credit spreads continue to grind tighter, supported by steady inflows, recovering risk appetite and a strong earnings season. With over 80% of the S&P 500 having now reported, the positive Earnings Per Share (EPS) surprise rate has risen to 84%, well above the 5-year average of 78%, while EPS year-over-year growth is on track for 28%, the strongest reading since Q4 2021.1 High yield continues to outperform investment grade across the board, with European high yield leading the way as the top-performing credit segment month-to-date.
Oil prices have retreated from their highs, with Brent crude briefly dipping back below US$100 per barrel, in-line with positive developments on the geopolitical front. Metal prices staged a recovery this week, with copper leading among industrial metals and silver outperforming for precious metals, gaining close to 8% month-to-date. The London Metal Exchange Index has returned to its all-time high.
Equities continued their advance, with technology remaining the dominant theme. The Philadelphia Semiconductor Index extended its rally a further 6%. Meanwhile, Asian markets – despite a shortened week due to national holidays – took on a distinctly FOMO (Fear Of Missing Out) tone; the Nikkei surging over 5% for the month and the South Korean KOSPI gained more than 10% as investors scrambled not to be left behind.2
The US dollar appreciated broadly in March at the onset of the Middle East conflict, consistent with its safe-haven characteristics and the rapid rise in oil prices – a dynamic reinforced by the fact that the commodity is priced in dollars. From April onwards, however, that trend has reversed, and the move has continued into May, as illustrated in the Chart of the Week.
The near-term USD weakness can be partly explained by several converging forces: an improvement in risk sentiment reducing the urgency to hold safe-haven dollars; energy prices retreating from their highs; and interest rate differentials shifting against the US dollar, as the Federal Open Market Committee appears notably more reluctant to tighten policy than its Western counterparts. This dynamic was reinforced last week when the Reserve Bank of Australia raised its cash rate by 25 basis points to 4.35%, its third consecutive increase, effectively unwinding the three cuts delivered last year.
For medium-term investors, however, the more important question is whether this marks the resumption of the broader structural US dollar downtrend that began in 2025 and was only temporarily interrupted by the onset of the Middle East conflict.
With over 150 national currencies in existence, the global economy needs a trusted unit of account and settlement asset so countries can trade even when they don't trust each other's currencies. Since the end of WWII, the US dollar has filled that role.
The US dollar's ascent was not accidental. The US emerged from WWII as the world's dominant economic and military power; under what became known as Pax Americana, it built an international order around open trade, capital flows and Western political values. Within that order, the US served as the primary provider of security, liquidity and financial stability. The institutional anchor for all of this was the Bretton Woods Agreement of 1944, which pegged the US dollar to gold at a fixed rate, tied other member currencies to the US dollar and allowed foreign governments to exchange their US dollar holdings for gold bullion.*
The arrangement carried a structural flaw from the start. As global trade expanded, the world needed ever more US dollars and the US eventually issued far more than its gold reserves could back. The imbalance grew until it became untenable. In 1971, President Nixon ended the US dollar's convertibility into gold in what became known as the Nixon Shock, and by 1973 the fixed exchange rate system had collapsed entirely, leaving major currencies to float freely against one another.3
Stripped of its gold backing, the US dollar found a new foundation in oil. In 1974, Treasury Secretary William Simon led secret negotiations with Saudi Arabia – secrecy demanded by Riyadh due to acute sensitivity to the optics of a visible alignment with Washington given US support for Israel – that produced a landmark arrangement. Saudi Arabia would price and sell its oil exclusively in US dollars, guarantee uninterrupted oil supply to the US (its largest customer at the time) and recycle the resulting revenues, the so-called “Petrodollars,” into US Treasury bonds. In exchange, Washington offered military protection and security guarantees, including the defence of vital shipping lanes through the Strait of Hormuz.4
Both tailwinds that created demand for the US dollar and US Treasurys may now be less prominent. At the same time, investors are watching the US government's addiction to deficit spending and cheap financing, a privilege that flows directly from the dollar's reserve currency status. The US has run a fiscal deficit every year since 2002, averaging a shortfall of 5.2% of GDP over that period, with no credible consolidation path in sight.5
One rising structural demand could come from dollar-backed stablecoins, such as USDT (Tether) and USDC (USD Coin), which must hold US Treasuries or cash equivalents as reserves against every token issued. Tether already holds more US Treasuries than many sovereign nations,6 and US legislation under the GENIUS Act has formalized stablecoins as a new class of structural Treasury buyer by requiring one-for-one backing with short-dated government debt.7
However, the thesis has its limits at present. Stablecoin demand remains small relative to the trillions in annual Treasury issuance. It is concentrated in short-term debt – rather than the long-end where US financing pressures are greatest – and ultimately depends on continued trust in the US itself.
What all this means is that the US dollar's trajectory will increasingly be determined by the underlying health of the US economy and the confidence investors place in the administration managing it – making economic fundamentals, political credibility and fiscal discipline the principal drivers going forward.
However, the US dollar will continue to retain its reserve currency status, as there are no credible alternatives. The depth and liquidity of US capital markets remain unmatched, US dollar invoicing and trade inertia are deeply embedded, and the US legal and institutional independent framework has no peer. But its share of global reserves is likely to move in line with shifting trade dynamics and the formation of regional alliances.
For investors, the US dollar should increasingly be understood as a currency navigating toward fundamental fair value. For policymakers, fiscal discipline and policy credibility is paramount.
Chart of the Week: relative strengthening and weakening of the US dollar.
Source: US Office of Management & Budget (OMB) Historical Tables; Federal Reserve Bank of St. Louis FRED (series FYFSGDA188S); US Treasury FiscalData. Retrieved May 8, 2026. For illustrative purposes only.
*An interesting fact: Although foreign creditors could exchange dollars for gold, domestic creditors could not. This was a consequence of the 1929 crisis – due to gold hoarding, an executive order in 1933 made it illegal for US citizens to own a meaningful amount of gold, punishable by up to a decade in prison. Executive Order 6102 was signed on April 5, 1933, by President Franklin D. Roosevelt, forbidding "the hoarding of gold coin, gold bullion and gold certificates within the continental United States." On December 31, 1974, President Gerald Ford repealed the executive order with Executive Order 11825, and on the same day, Congress restored Americans' right to own gold.8
References
1. Factset Insight, “Analysts Making Largest Increases in Quarterly EPS Estimates for S&P 500 in 5 Years,” as of 5th May 2026
2. Deutsche Bank, “Early Morning Reid: Macro Strategy,” as of 7th May 2026
3. US Department of State, office of the Historian. “Nixon and the End of the Bretton Woods System, 1971-1973”.
4. Bloomberg, “The Untold Story Behind Saudi Arabia’s 41 US Debt Secret,” as of 30th May 2026
5. Federal Reserve Bank of St Louis, as of 9th April 2026.
6. Morgan Stanley Investment Management, as of 15th September 2025. “Stablecoins – Modernizing financial infrastructure”
7. The White House Washington research, as of 8th April 2026. “Effects of stablecoin yield prohibition on bank lending”.
All sources are Bloomberg unless otherwise stated.
Past performance is not a reliable indicator of current or future results.
References to specific companies is for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account.
This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of 8th May 2026 and may change without notice.
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