De-dollarisation gains momentum, but greenback's dominance remains intact— for now

The global financial system is slowly but steadily shifting away from its reliance on the US dollar, an expert said. While the greenback remains the cornerstone of international trade and finance, its exceptional status is beginning to erode.

“The conversation around de-dollarisation often gets muddled,” he noted. “It’s crucial to separate the cyclical weakness of the dollar from its structural role in the global economy,” Jacob Falkencrone, Global Head of Investment Strategy at Saxo Bank, told Khaleej Times, in an interview. 

While recent depreciation reflects short-term macroeconomic factors — such as the Federal Reserve’s pivot toward monetary easing — the longer-term trend is more telling. Central banks are diversifying their reserves, and countries are increasingly settling trade in regional currencies to reduce dependence on US financial institutions.

Despite this shift, Falkencrone cautioned that no credible alternative currently exists. The euro faces recurring financial instability, the Chinese yuan is constrained by capital controls, and other currencies lack the scale and trust to replace the dollar. “De-dollarisation is happening,” he said, “but it’s a slow erosion, not a collapse.”

AI and geopolitics: The twin engines of market transformation

Beyond currency dynamics, Falkencrone identified artificial intelligence and geopolitics as the two megatrends reshaping global markets. “AI is the leading driver,” he said, citing the $365 billion in capital expenditure by five major US tech firms—an investment equal to Denmark’s GDP. These companies are not only powering innovation but also influencing investor sentiment across sectors.

Geopolitical tensions, particularly in Europe, have reignited concerns around defense and security. Governments are ramping up spending on advanced technologies, including AI-powered surveillance systems, drones, and automated defense platforms. “This is where AI intersects with geopolitics,” Falkencrone explained. “Innovation and defense are becoming tightly linked.”

Supply chain realignment: From globalisation to regionalisation

The restructuring of global supply chains is another defining trend. Triggered by the Covid-19 pandemic and intensified by trade tensions, companies are moving away from single-market dependencies. “We’re seeing a shift toward near-shoring, friend-shoring, and home-shoring,” Falkencrone said.

Europe is investing in energy independence and domestic manufacturing, while the US is pushing to bring production back home. Apple’s “China plus one” strategy — expanding into Vietnam, Indonesia, and India — is emblematic of this trend. “India is emerging as a major beneficiary,” he added, “but Southeast Asia offers undervalued opportunities.”

Jacob Falkencrone, Global Head of Investment Strategy, Saxo Bank.

Fed policy and market fragility

Falkencrone also weighed in on the US Federal Reserve’s recent rate cuts, describing them as risk management rather than a sign of economic strength. “The Fed is walking a fine line,” he said. “Rate cuts may support smaller firms, but they also risk reigniting inflation.”

With equity markets near record highs and signs of economic slowing, the mismatch between market performance and real-world indicators is growing. “We’re in a Goldilocks economy — neither too hot nor too cold — but it’s precarious,” he warned.

Valuation risks and the illusion of diversification

US equity valuations are historically high, driven by a handful of mega-cap tech firms. “Just ten companies account for 40 per cent of the S&P 500’s market cap,” Falkencrone said, pointing to Nvidia’s outsized influence. This concentration creates what he calls a “diversification illusion,” where passive investors are unknowingly overexposed to a narrow set of companies and themes.

Global investment outlook: Look beyond America

Despite the strength of US tech firms, Falkencrone urged investors to diversify geographically. “The US market is heavily owned and valuations are stretched,” he said. Asia, Latin America, and Europe offer compelling alternatives.

Southeast Asian nations like Indonesia and Vietnam are benefiting from supply chain shifts and demographic advantages. Japan is undergoing corporate reforms, and Mexico is gaining from nearshoring. Europe, with its discounted valuations and a weakening dollar, is increasingly attractive to global investors.

“The balance of potential lies outside the US,” Falkencrone concluded. “Now is the time to diversify and rethink portfolio strategies in light of structural shifts—from de-dollarisation to AI-driven innovation.”