The “US dollar exceptionalism” narrative comes in many flavors, just like its political counterpart, “American exceptionalism.”

In both cases, the underlying thesis says there’s something special about the US that makes it… well, exceptional, and “uniquely virtuous,” as one Harvard political scientist put it a dozen years ago while calling the whole story a “myth.”

Decades of foreign policy boondoggles, worsening political gridlock and, more recently, the deterioration of democratic norms and the broadening of an institutional credibility crisis, have steadily eroded America’s international image and undercut the country’s claim to being a “shining city on a hill.” But the appeal of US dollar assets remains. At least for now.

“De-dollarization” as a macro theme comes and goes, waxes and wanes. It was popular last year, when financial sanctions leveled against Russia rekindled the idea of the “a new world monetary order” (as one analyst famously described his version of the de-dollarization meme) built around the renminbi. Fast forward to 2023 and Chinese policymakers are struggling just to keep the yuan stable amid a floundering economy and the appearance of policy ineptitude. Meanwhile, it’s all American policymakers can do to keep the US economy from overheating to the point that inflation re-accelerates.

Although the end of Fed hikes should, all else equal, be a catalyst for a weaker dollar, the red-hot economy, a flagging yuan, still-favorable rate differentials and an inexorable rally on Wall Street, argue against durable depreciation.

In a new note, Goldman’s Michael Cahill, Lexi Kanter and Isabella Rosenberg talked at some length about the factors which contributed to a decade of overvaluation for the greenback. “Portfolio flows chasing ‘US exceptionalism’ and escaping challenges abroad provide the structural support to the dollar’s high valuation,” they wrote.

You’ve heard plenty, I’m sure, about the allegedly waning influence of the dollar globally. And yet, as Cahill, Kanter and Rosenberg noted, “the share of cross-border portfolio investment held in US assets rose from about 20% to more than 25%” from 2013 through 2023.

That equates to an increase of more than $7 trillion in US equities, bonds and money market instruments held abroad over a decade.

There’s no mystery here. Global portfolios have increased their share of US dollar assets because the yields are better, the credit risk is lower and US dollar assets have outperformed. Capital goes where it’s welcome, and where it can generate superior returns.

Consider Europe, for example. At various intervals over the past eight or so years, yields in the periphery were lower than US Treasury yields. Ignoring the self-evidently ridiculous notion that Italy or Greece are somehow better credits than the US, countries in the eurozone aren’t monetary sovereigns. They can (all of them, even Germany) default involuntarily on their public debt — they can’t unilaterally conjure euros. You could argue the risk of default is so low in Germany as to be meaningless, and you could also argue that bunds are a better credit than Treasurys, but German yields were deeply negative for a very long time.

“In the case of the euro-area, it is clear that a combination of credit risk, QE and negative rates drove investors out of periphery and core fixed income,” Cahill, Kanter and Rosenberg wrote, noting that total outflows from euro-area fixed income amounted to EUR3 trillion during the negative rate era. Where do you imagine that went?

The dynamic “was even clearer” in Japan, Goldman remarked, reminding market participants that “US Treasurys were by far the biggest beneficiary” of the shift away from a home bias.

And then there’s Norway’s massive SWF, where the share dedicated to US investments rose from just under a third in 2013 to nearly half as of 2021.

So, in order for the tide to turn, the rest of the world has to become a more attractive place to invest — risk-adjusted returns have to get better, otherwise why would anyone eschew US assets? If the answer is “they wouldn’t,” then that’s a structural support pillar for the dollar. It doesn’t preclude periods of weakness, but it argues against a prolonged stretch of depreciation.

“The end of the dollar’s run will require… a clear end to some of the problems that have plagued foreign investments in the post-GFC era,” Cahill, Kanter and Rosenberg went on. Even then, “sticky” US real rates and “the potential for an A.I.-driven productivity boost” could prop up US markets, or make the choice to rotate into other locales more difficult, even as the Fed winds down its tightening cycle and even if the world avoids a recession and risk appetite for RoW assets improves as a result.

“[T]he end of most hiking cycles [is] typically followed by a quick return to easier policy and a relaxation in safe-haven flows to dollar assets, but, we continue to think this cycle is different in more ways than one, and are sticking with our ‘shallow’ dollar depreciation view,” Goldman concluded. The key word there is “shallow.” The bottom line from Cahill, Kanter and Rosenberg: “We think dollar assets will still be a hard bar to beat.”

America is still exceptional in some regards, at least.