By Michael O’Neill

Love is in the air. It always is around February 14. Some believe Cupid has already loosed a volley of golden arrows ahead of Valentine’s Day, striking thousands of unsuspecting men and women.

Those people fall into an immediate, overwhelming state of infatuation, leading to gifts of flowers, chocolates, and romantic dinners. Unfortunately, Cupid’s poor marksmanship missed the US dollar, and it sparked a broad-based sell-off across the G-20 as traders looked for love elsewhere.

We Don’t Love You

A popular narrative for the past six months has been speculation that the days of US exceptionalism are numbered. The story gained traction due to the greenback’s reaction to some inflammatory news reports.

A few weeks ago, a Reuters headline screamed, “Big North European Investors Reassess US Exposure as Geopolitical Risk Mounts.” The article said three pension funds, a top investment adviser, and a leading industry body suggested that Europeans were shifting away from the US. The adviser said discussions about trimming US exposure were widespread and that roughly half of clients were considering action. By and large, the article was all baloney and no bread.

The story surfaced around the time the US Justice Department subpoenaed Fed Chair Powell and Trump was threatening military intervention in Greenland. The conversations were not entirely baseless. Investors know Trump is comfortable projecting military strength, from regime pressure in Venezuela to dispatching the USS Abraham Lincoln strike group to the Arabian Sea to pressure Iran over its nuclear program.

Those headlines ran from January 15 to January 27, and the greenback dropped, with the US dollar index losing 4.0%. But there is more to the story.

Reality Bites

Dollar debasement has a nice ring to it, but it is neither simple nor accurate. To suggest Europeans were shifting away from US assets based on the actions of a few small funds and one adviser is a huge exaggeration.

Norway is part of Europe, and its sovereign wealth fund, with over $2.0 trillion in assets, increased its holdings of US Treasuries in 2025. Furthermore, where else would they invest? There is no other destination offering investors a deep, stable financial market and a robust economy powered by leadership in tech and AI.

The US dollar remains the world’s reserve currency and sits on one side of nearly 90% of global FX transactions. The bloom may be off the rose, but there is still no substitute that offers $7 trillion a day in liquidity and comparable institutional depth.

However, there may be some truth to speculation about dollar diversification, but that tale does not explain the 9.0% rally in the Australian dollar, the 6.9% rise in the kiwi, or the 3.3% gain in the loonie over the past three months. It is better to look at central banks. Investors are in love with yield, and that, more than anything else, is behind the greenback’s slide.

I Love You, but I Love Yield More

When a central bank like the RBA hikes rates, as it did on February 3, 2026, it increases the return on Australian-denominated assets. That attracts hot money from global investors and boosts demand for the Aussie dollar. Conversely, when the BoE signals potential cuts from its current 3.75% level to combat stagnation, the pound becomes less attractive relative to higher-yielding peers.

The 800-pound gorilla in central banking is the US Federal Reserve. Its supremacy stems from control over the world’s primary reserve currency, the US dollar. With nearly 60% of global FX reserves and around two-thirds of international debt denominated in dollars, the Fed effectively sets the price of money for the planet.

Trump wants that price materially lower. His public pressure on Fed Chair Powell, the nomination of Kevin Warsh, and criticism of sitting governors signal a desire to shape monetary policy more directly.

Yesterday Trump said, “This country should have the lowest interest rates in the world. Every point is $600 billion. If we went down two points, we don’t have a deficit anymore.”

The latest US nonfarm payrolls report, released February 11, shows a more resilient labour market than expected, validating the FOMC’s guidance of higher rates for longer.

FX traders are skeptical. That explains why the US dollar is already erasing its post-NFP gains. Markets continue to believe that a post-Powell Fed will be more aligned with Trump’s monetary preferences.

That sentiment underpins the Canadian dollar because US rates may fall while Canadian rates remain on hold, possibly for the rest of the year. BoC Governor Tiff Macklem reinforced that view when he said the economy’s challenges are structural and cannot be solved with monetary policy. They require fiscal solutions at the federal level.

Cupid may not be shorting the dollar, but he is certainly chasing yield.