April 19, 2025 – The U.S. dollar has served as the global reserve currency since the end of the second world war.
Reflecting the nation’s economic dominance at the time, in 1944, forty-four allied nations agreed to peg their currencies to the U.S. dollar under the Bretton Woods Agreement. The dollar was convertible to gold at a fixed rate and therefore, was widely regarded as a reliable store of value. In addition to its use as a currency peg, the reserve currency was also utilized for global trade settlement and international debt issuance.
The United States had a unique combination of features that made its dollar well-suited to serve as the world’s currency – political stability, a strong legal system, as well as the largest and most liquid capital markets.
While the convertibility of the dollar into gold ended with the elimination of the gold standard in 1971, the dollar retained its dominance in global commerce. Currently, the U.S. dollar accounts for more than half of international foreign-exchange activity and global foreign exchange reserves.
This role as the global reserve currency has provided significant benefits to the United States, including:
- Lower borrowing costs: High demand for U.S. Treasury bills, notes, and bonds keeps yields relatively low, allowing the country to finance its budget deficit cheaply.
- Seigniorage: The ability to print an endless supply of paper money, held internationally without demanding interest, which can be exchanged for real world goods and services.
- Geopolitical leverage: The U.S. dollar’s dominance and widespread use allow for the implementation of sanctions to weaken the country’s enemies.
The Ultimate Confidence Game
A confidence game is a scenario in which a dominant party gains the trust of a victim in order to deceive and defraud them. Over time, the party running the confidence game creates a sense of credibility, which they later seek to exploit and profit from.
The ultimate confidence game on a global macroeconomic scale is the U.S. dollar’s reserve currency status. The nation has spent more than 80 years building trust and authority in global trade, only to see its reserve status called into question in a matter of weeks due to policy missteps amidst the recent tariff-driven market turmoil.
The notion that market participants are questioning the status and safe haven nature of the U.S. dollar, along with U.S. Treasury bonds, would have been considered earth-shattering mere months ago.
However, this is the current reality that we need to accept.
Historically, during market panics, investors flock to the dollar and Treasurys as a safe haven due to perceived stability, causing the dollar to appreciate. Market demand for Treasury securities pushes up prices, causing yields to decline.
The current trade war-related market stress exhibited a shockingly different dynamic. Recent policy mistakes have shaken investors’ confidence in the safety of U.S. assets and have sought to exit en masse. Instead of rallying during the market stress, as it did historically, the U.S. dollar has plummeted. Compared to a basket of major currencies, the dollar has fallen -9.1% this year and -4.8% month-to-date.
Investors have sought solace in the Euro, Yen, and Swiss Franc.
Moreover, no longer viewed as a safe haven (at least for now), U.S. Treasurys have been abandoned by market participants in favour of gold. Long-term U.S. Treasury yields have risen amidst the market maelstrom, exhibiting the price action of an emerging market and not the leading developed market.
As the Economist recently stated, “a currency is only as good as the government that backs it.”
It is not only the capital markets that have had their confidence come into question, but business operators as well. The confidence that Chief Executive Officers have in the economy has fallen to its lowest level since the Global Financial Crisis.
Source: Apollo
In addition, equity fund managers continue to flee the United States. According to BofA’s latest Global Fund Manager Survey, U.S. equity allocations have fallen 53% in two months, representing the most significant drop on record.
A net 36% of fund managers are now underweight U.S. equities, the lowest level in two years. In addition, more than 80% of fund managers are bearish on the economy, the most pessimistic outlook over the survey’s 30-year history.
In our most recent memo, Economic Own Goal, we noted that the ‘Liberation Day’ tariff strategy represented “the worst self-inflicted wound that I have ever seen an administration impose”.
Despite the bluster from the administration around the notion that the United States has suffered and has been “ripped off” from globalization, the numbers tell a different story.
GDP per capita is our best proxy for a nation’s prosperity. It measures the average economic output of a country per person and serves as a rough indicator of living standards and economic health.
Since the United States assumed the role as the global reserve currency under the Bretton Woods Agreement in 1941, no other nation has benefitted more. They say a rising tide lifts all boats, and no other boat has risen as much as America’s from globalization.
Source: Bolt and van Zanden – Maddison Project Database 2023
Therefore, it is no surprise that nearly all market prognosticators are scratching their heads regarding the objective of the trade war. At the start of the year, the U.S. had an enviable position – above trend economic growth, below average unemployment rate, and a stock market that was the envy of the world. Things weren’t quite perfect, but they were about as close as you can get.
While the administration has communicated a myriad of stated objectives of the trade war (fentanyl, immigration, trade deficits, etc.), the most pernicious goal is to build factories and produce more manufacturing output in the U.S.
Bringing back manufacturing via tariffs was attempted at a smaller scale in 2018, providing a useful case study.
In his first term, President Trump implemented tariffs on washing machines. These import duties raised costs paid by consumers by $1.5 billion, while bringing in just $82 million in tariff revenue. Each manufacturing job created by the tariffs in the U.S. cost consumers $815,000 per annum, which is 19x the average salary earned manufacturing appliances.
A study from the Cato Institute revealed that the average annual cost per job saved or created in the U.S. from tariffs between 1950 and 1990 was $810,000 (adjusted to 2025 dollars). It is safe to say that tariffs have failed to efficiently create sustainable manufacturing employment.
Nevertheless, there is evidence that an end game of the trade war is emerging. While the 10-year U.S. Treasury yield has proven to be a pain point for the administration’s trade war objectives, forcing two tariff walk-backs as yields breached 4.5%, the 2026 midterm elections loom large as early indications point to rapidly declining support for the current trade policy. As political commentators say, “it’s the economy, stupid”. Recessions can have a significant impact on U.S. midterm elections, leading to electoral setbacks for the incumbent president’s party and in turn, their ability to implement policy objectives.
Senator Ted Cruz recently warned of a midterm “bloodbath” if the tariffs cause a recession, indicating the potential for a Democratic House, and even a Democratic Senate. “If we’re in the middle of a recession and people are hurting badly, they punish the party in power,” Cruz stated.
As long as harsh tariffs remain in place and the related trade war uncertainty lingers, the U.S. economy will suffer, and job losses will increase. At some point, self-inflicted recessionary conditions will become politically intolerable, leading the administration to pivot its trade policy. This dynamic appears to be emerging, with the President choosing to provide tariff relief to allies (via the recently announced 90-day pause), while further ramping up pressure on China. The end game of isolating China via trade barriers, with the assistance of allies (which will likely be provided additional olive branches) while the trade war dissipates with everyone else, is a likely scenario over the next six to twelve months. Until then, look for markets to remain rocky and range bound.
Due to policy uncertainty and expected choppy markets over the near to medium term, investors may want to consider taking a hedged equity approach. To facilitate idea generation, we highlight one top-decile stock that is forecast to outperform and one bottom-decile stock that is predicted to underperform in this month’s AlphaRank Top Stocks.
OUTPERFORM: Dexterra Group Inc (TSX: DXT) is a Canadian support services company that provides facility operations and maintenance, modular building solutions, and workforce accommodations for various industries. DXT exhibits rising earnings expectations, showcasing strong operating momentum. In addition, DXT’s attractive valuation of 5.3x EBITDA and a 12.9% free cash flow yield indicates upside potential along with a margin of safety. To round it off, the company’s high return on capital of 28.5% indicates a quality business model, as its stock price continues to showcase positive momentum. With an AlphaRank score of 99.2/100, we expect the stock to outperform. Disclosure: Long DXT in the Accelerate Canadian Long Short Equity Fund (TSX: ATSX).
UNDERPERFORM: Delek US Holdings Inc (NSYE: DK) is a downstream energy company operating in refining, logistics, and retail. In 2024, Delek’s revenues dropped by 28.2% year-over-year, and the company reported a net loss of $58 million. Analysts forecast continued challenges, with an expected EPS of -$3.94 for 2025 and -$0.34 for 2026. The company has a high debt load, which can be burdensome, especially in a high interest rate environment. Approximately 15.14% of Delek’s float is sold short, indicating that sophisticated investors are betting against the stock. Despite its recent share price decline, its valuation remains stretched at 15.6x EBITDA. With an AlphaRank score of 0.3/100, we expect the stock to underperform. Disclosure: Short DK in the Accelerate Absolute Return Fund (TSX:HDGE).
The AlphaRank Top and Bottom stock portfolios exhibited positive relative performance last month:
- In Canada, the top-ranked AlphaRank portfolio of stocks gained 1.7%% compared to the benchmark’s -1.9% decline, while the bottom-ranked portfolio of Canadian equities fell by -4.7%. The long-short portfolio (top minus bottom ranked stocks) gained 6.4%, as the top-ranked stocks markedly outperformed the bottom-ranked securities. Over the past five years, the top decile AlphaRank portfolio has risen more than 200%, while the bottom-ranked portfolio has risen approximately 50%.
- In the U.S., the top-decile-ranked equities dropped -5.6%, matching the S&P 500’s -5.6% decline. Meanwhile, the bottom-ranked stocks plunged by -8.6%, leading to a 3.0% return for the top decile minus the bottom decile long-short portfolio. Over the past five years, the top-ranked U.S. equities have gained more than 175%, while the bottom-ranked portfolio has fallen nearly -30%.
AlphaRank Top Stocks represents Accelerate’s predictive equity ranking powered by proven drivers of return. Stocks with the highest AlphaRank are expected to outperform, while stocks with the lowest AlphaRank are anticipated to underperform. AlphaRank assigns a numeric value to each security from zero (bottom-ranked) to 100 (top-ranked) based on selected predictive factors. All Canadian and U.S. stocks priced above $1.50 per share and with a market capitalization exceeding $100 million are evaluated. In both the Accelerate Absolute Return Fund (TSX: HDGE) and the Accelerate Canadian Long Short Equity Fund (TSX: ATSX), Accelerate funds may be long many top-ranked stocks and short many bottom-ranked stocks. See AccelerateShares.com for more information.
