This week, the dollar extended its losses following disappointing U.S. retail sales data. In the view of experts from investment firms, the weakening of the dollar is likely to continue, especially in a context of further rate cuts by the Federal Reserve (Fed).
Tim Murray, Capital Markets Strategist in the Multi-Asset Division at T. Rowe Price, outlines four reasons why he believes the U.S. currency will likely continue to weaken after nearly 16 years of steady appreciation: “The recent decline reflects a combination of structural and cyclical factors, suggesting that the move may have further room to run rather than representing merely a short-term correction. First, fiscal concerns are increasingly putting pressure on the currency. Second, monetary policy expectations are becoming a clear headwind. Third, political dynamics are influencing foreign demand for dollar-denominated assets. And finally, global capital flows are acting as an additional source of pressure,” Murray notes.
However, from a valuation perspective, this expert believes the dollar remains elevated relative to its own history and against most major currencies. “Even after its recent weakness, it remains expensive by historical standards,” he adds.
The outlook of Axel Botte, Head of Market Strategy at Ostrum AM (an affiliate of Natixis IM), is similar: “The greenback will likely face structural headwinds in the coming years. The dollar’s carry against the euro will fall to around 100 basis points and will turn negative against the pound sterling and the Australian dollar this year.” For Botte, the dollar’s status as a safe-haven asset is being called into question and it may decline at the same time as U.S. equities and bonds.
“This is the phenomenon known as ‘sell America,’ which has shown that the dollar is no longer the ultimate safe-haven currency. U.S. exceptionalism will also be tested as the AI boom comes under greater scrutiny from investors. Dollar hedging flows could increase, and valuation metrics suggest that the greenback has room to adjust downward,” Botte adds.
Investor options
If this outlook materializes, the dollar’s rate advantage over other currencies would consequently erode. In addition, global investors’ efforts to diversify could add further downward pressure and open up tactical opportunities in higher-yielding currencies. “With dollar weakness likely to persist, investors should review their currency allocations and consider the benefits of diversification. For those with an affinity for gold, we consider an allocation of up to a mid-single-digit percentage within a diversified portfolio to be appropriate,” says Mark Haefele, Chief Investment Officer at UBS Global Wealth Management.
In Murray’s view, for investors considering ways to potentially hedge against a weaker dollar, increasing exposure to assets outside the U.S. may offer diversification benefits. “Emerging market and local currency bonds can benefit directly from dollar depreciation, while international equities provide both equity returns and potential currency gains. After years of dollar strength that led some investors to reduce their international exposure, a sustained period of weakness could encourage a reallocation toward global markets.”
Undoubtedly, however, the key task for managers and investors will be to continue monitoring the behavior of the dollar. The U.S. asset manager Muzinich & Co reminds that “in the macroeconomic sphere, the key indicator to watch will be the U.S. dollar, as a sovereign currency is often seen as a barometer of both the health of the economy and confidence in the administration that governs it.”
