On Tuesday (August 26), the US Dollar Index initially declined 0.3% to around 98.08 following President Trump's decision to immediately remove Federal Reserve Governor Kugler from office. However, the dollar has since recovered losses and is currently trading near 98.43. Increased expectations for monetary policy easing have provided support for various non-US investment assets including gold and the Japanese yen.

As one of the premier investment assets, US equities are losing their yield advantage in 2025 - not due to European or Asian corporate fundamentals catching up, but because of breakthrough dollar depreciation (11% decline in the first half, with potential for another 10% drop by year-end) that has boosted non-US asset valuations. Most unusually, the dollar continues declining despite elevated US bond yield spreads. Non-dollar assets include: the euro, British pound, Japanese yen and their denominated stocks and ETFs, commodities, gold, US export-oriented company stocks, and emerging market assets.

For traders with long-term participation in global capital markets, a persistent consensus has been that US stock market performance has consistently outperformed other international markets for years. However, according to market data, this established pattern was broken in 2025. Does this mean European and Asian corporate fundamentals are surpassing their US counterparts? The answer is clearly no. From core metrics of revenue and profitability, US companies overall still outperform international competitors.

The key driver behind non-US investment returns surpassing US returns lies in dollar depreciation relative to the pound, euro, and yen - this currency-level shift directly boosts the valuation of overseas assets priced in dollars.

Market data shows the dollar exchange rate exhibited a clear downward trend in 2025, with declines showing "breakthrough" characteristics: first-half dollar depreciation reached 11%, marking the largest same-period decline since 1973. Although July saw a modest rebound supported by short-term economic positives, the currency subsequently resumed its downward trajectory. Morgan Stanley's latest forecast indicates the dollar may face an additional 10% depreciation space through the end of 2025.

It should be objectively noted that while the dollar began a strong cycle after the 2020 pandemic, its long-term volatility characteristics remain unchanged - historically, this is not the dollar's first depreciation period, and current exchange rate levels remain elevated compared to most periods over the past decade.

The core contradiction lies in this dollar depreciation occurring against the unconventional backdrop of "US bond yield spreads still at elevated levels." From classic exchange rate pricing logic, yield differentials are the core variable driving exchange rates: when US rates exceed those of other economies, capital flows into the US bond market, boosting dollar demand and supporting the exchange rate.

Charts clearly demonstrate this correlation: the dollar exchange rate and US-European yield spreads have long maintained high synchronization. However, January 2025 became a key inflection point - thereafter, US rates continued exceeding other countries' rates while the dollar exchange rate simultaneously declined, creating a significant and risk-laden divergence from conventional logic.

Robin Brooks of the Brookings Institution offers analysis with trading reference value: "The recent simultaneous appearance of rising US bond yields and dollar decline is a price behavior requiring high vigilance. Its logic resembles the UK market turmoil of late 2022 - markets selling both US bonds and dollars (according to market rumors, European funds were major selling forces), indicating 'fiscal risk premium' is gradually forming."

From a trading perspective, the underlying logic of the dollar's unexpected depreciation is essentially asset repricing where "yield differential attractiveness yields to economic outlook concerns": despite US bond yields maintaining relative advantages, investor risk appetite toward the US economy has significantly declined.

Capital flow data confirms this trend: Schwab notes that from early March to mid-April, Japanese domestic investors net sold foreign bonds for six consecutive weeks, marking the beginning of non-US capital "withdrawing from dollar assets and turning toward domestic markets." JPMorgan data further shows that from January to July 2025, non-US registered US equity ETFs averaged only $5.7 billion in net inflows, nearly halving from the $10.2 billion in the same period of 2024. European investors' domestic allocation preferences are even more pronounced - through the end of July, European domestically-registered European market ETFs achieved year-to-date net inflows of $42 billion, setting a historical record for the period.

Leading institutions including JPMorgan, Morgan Stanley, and Schwab have reached consensus: this capital migration essentially represents overseas investors' repricing of US economic prospects - expected returns from non-US markets now significantly exceed those from US markets.

In-depth analysis reveals policy uncertainty as the core factor causing declining US economic attractiveness, directly suppressing dollar exchange rates through "risk premium elevation," which can be broken down into three dimensions:

Federal Reserve Independence Impact: This morning's presidential decision to immediately remove Fed Governor Kugler caused the Dollar Index to plunge 0.3% intraday. July 16 comments about "possibly firing Powell" triggered market panic, with dollar rates plummeting 1.2% within one hour. While rates subsequently recovered somewhat, concerns about "political interference with the central bank" have formed long-term negatives - market trust in Fed policy independence has been damaged, weakening the dollar's credibility foundation as a "safe-haven currency."

Fiscal and Tariff Policy Volatility: On one hand, legislation reducing fiscal revenue by $4.1 trillion over the next decade, combined with high US fiscal deficits, heightens market concerns about US debt sustainability. On the other hand, erratic tariff policies intensify operational uncertainties for multinational enterprises, further reducing dollar asset allocation value.

Economic Fundamental Signal Disruption: Morgan Stanley emphasizes that recent signs of US labor market weakness have emerged, while policy-level "tariff negotiation deadlocks" and "Fed leadership transition controversies" further amplify economic outlook uncertainties, leaving dollar exchange rates lacking fundamental support.

Trading impacts may create chain reactions: This dollar depreciation round is not merely currency volatility but triggers global asset repricing "dominoes": Dollar bulls should beware of dual pressure from "yield advantage ineffectiveness + policy risk premium elevation," avoiding falling into "high rates must support dollar" habitual thinking. Cross-market allocators can focus on valuation recovery opportunities in non-US assets (especially European domestic assets and yen-denominated assets). Industry traders need to hedge "dollar depreciation → rising import cost" risks in advance - US manufacturing companies' raw material procurement costs and imported consumer goods' terminal prices will all face upward pressure, with this transmission chain entering the trading pricing cycle.

The Dollar Index remains suppressed by the August 1 evening star pattern before exceeding 99.36. Current support levels rise with the trendline, also representing the neckline of the larger formation. First resistance stands at 98.63, representing multi-day closing prices. Both MACD and RSI hover near the bull-bear dividing line. Traders should monitor upcoming US releases of July core PCE price index and August CPI, August non-farm employment report, particularly with prices near the neckline, seeking trading opportunities.

As of 15:31 Beijing time, the Dollar Index is trading at 98.46.