Geopolitical events are testing the traditional utility of the US dollar, where are international investors turning now?
Since the Bretton Woods agreement in 1944, the US dollar has been the quintessential safe haven asset. When global investors had excess capital or when geopolitical instability spooked markets, the global reserve currency was what investors sought. In the wake of both ‘Liberation Day’ and the recent US entry into conflict between Israel and Iran we have seen the US dollar steadily weaken against other currencies. This trend has prompted Tyler Mordy and his investment team to take a closer look at where global investors are finding safe havens now.
Mordy is the CEO and CIO of Forstrong Global Asset Management. He outlined why we have seen the US dollar fail to fulfil its safe haven function in recent months and highlighted where global investors have found alternative sources of security. He emphasized three distinct ‘buckets’ are offering different forms of safety for investors and highlighted how each area can help provide greater stability in a rapidly changing world.
“We frame these new safe havens not around the idea of short-term traditional volatility buffers, but around structural resilience in a fractured, multipolar world,” Mordy says. "Recent events, like the conflict with Iran, are largely unpredictable black swan events. At Forstrong, we prioritize building portfolios for our clients that are resilient to long-term macro shocks and shifts."
Part of that view is a changing relationship between global investors and US assets, including the US dollar. Mordy notes that some of the recent downturn in USD can be attributed to the idea that ‘capital flows where it’s treated best.’ He notes that the proposed increases in withholding tax on foreign investors via section 899 of the Big Beautiful Bill has become an issue of concern for many of the foreign institutions and investors that hold US assets.
More broadly, Mordy describes Trump’s policy as “one part improvisation one part populism.” As a result, many global investors are seeing the US as less secure and stable. Add to that, US sovereign debt levels appear to be tipping past a point of tolerability for bond markets. Mordy also sees the US dollar as having hit close to its overvaluation levels comparable to its 1985 and 2002 secular peaks.
He now believes many global investors are no longer as willing to take on the same amount of exposure to a country with an overvalued currency and less political stability. Instead, significant amounts of capital from US allies like Canada and major European economies are now being repatriated, which has spurred some of the capital market trends we now see in geographies like Europe, which is home to a strong Euro and some of the best performing stock markets this year. He also points to Trump’s trade war as a wake-up call for many nations, catalysing a structural shift toward economic self-reliance. Europe’s recent pivot away from austerity to fiscal stimulus — including moves like Germany suspending its debt brake — marks a profound change in policy direction.
Those developed market investors shifting from previous US overweights form the first structural safe haven ‘bucket’ in Mordy’s view. That is not taking the form of a panicked capital flight, however. Rather, many countries enjoying surpluses that would have once been invested in US assets are now keeping that money in domestic markets. He cites the relative outperformance of emerging market bonds vs US treasuries so far this year as evidence towards that domestic shift. Many developed and middle-income economies have invested in domestic resilience since initial trade tensions began in 2018. Moreover, asset markets in many of these countries are particularly good value after decades of under allocation domestically and overallocation to the US.
Mordy also sees safe havens emerging in those providers of raw materials and inputs to economic and security self-sufficiency. “In a fragmenting world prioritizing domestic self-sufficiency, control of key resources becomes less cyclical and more strategic,” he notes. . Copper producers, for example, have been strong performers year to date. Chile, Mordy says, has been viewed as a relatively stable country with key access to this crucial mineral. Canada, too, has shown similar traits despite the overhang of US tariffs. Resource producing countries like Chile and Canada, Mordy notes, might have been viewed as high beta plays by investors, but he notes that more institutional investors are looking favourably at the long-term advantages in those resource producers.
The third area where Mordy sees emerging safety is in those developing countries that have prioritized domestic demand. India, for example, has built a growing and resilient middle class with a greater propensity to spend. That insulates India somewhat from the vicissitudes of US trade policy. Despite a relatively expensive equity market, Mordy believes that these valuations will remain high because of the quality of the Indian narrative. China, too, looks set to take on greater growth potential as it digests the last elements of its property bust and shifts more towards consumption-driven growth.
"While the US remains the largest and most liquid market, its advantages have become increasingly priced in," Mordy notes. The shifts in global investor sentiment that Mordy now sees represent a compelling opportunity for global diversification to help drive alpha for investors.
“For over a decade, the US has been a one-way trade — dominating capital flows and investor attention,” Mordy says. “But that era is starting to unwind.” He notes that international assets are already beginning to strongly outperform as capital rotates away from an overvalued and politically volatile US market.
Mordy’s message to investors is clear: we are at the beginning of another cycle for international outperformance and the case for global diversification has never been stronger. “This is both about managing risk with new safe havens but also about capturing opportunity,” Mordy says. “The next cycle won’t be led by yesterday’s winners. The edge will belong to those who think globally and stay ahead of the major macroeconomic shifts.”
