How to Invest If the U.S. Dollar Loses Might


Economic signals suggest the greenback is poised for a decline. Investors may want to reallocate assets accordingly.

The mighty U.S. dollar has helped exemplify a post-COVID business cycle of high yields and stronger economic growth in the U.S. relative to other parts of the world—but signs are emerging that the buck may be headed for bear territory.


The strong greenback has helped the Federal Reserve’s inflation fight by muting pricing pressures from American imports and critical commodities. By lowering certain costs, it has also helped keep financial conditions relatively loose, offsetting some of the tightening impact of Fed rate hikes. This, in turn, has supported recent U.S. equity gains.


But recent market developments suggest that the dollar’s 16-year secular bull run that emerged from the 2007-2008 financial crisis may finally be losing steam. Indeed, the dollar has started to weaken even as the market now appears to expect that rates may remain higher for longer, which would typically lend support to the dollar.


Could the dollar be poised for its next secular bear market? Morgan Stanley’s Global Investment Committee believes it’s a possibility that’s at least worth considering, given the following.

  1. 1
    Commodity signals:


    Commodities, which tend to be negatively correlated to the dollar, have been advancing recently. Gold, for one, has hit an all-time high of $2,183 per ounce, up 18% since last October, which may suggest investors think that economic growth is slowing. What’s more, Bitcoin, often considered digital gold, is up more than 150% over the same period. These trends appear in line with more-recent rebounds in cyclical commodities, such as oil and copper.


  2. 2
    Bank of Japan’s policy shift:


    Since early 2021, the Japanese yen has depreciated against the U.S. dollar by about 50%. That was largely a function of widening interest-rate differentials, as the U.S. Fed raised rates aggressively while the BoJ held fast to a program of yield-curve control in an effort to keep yields lower. But given improvements in Japan’s real growth, inflation and wages, odds are rising that its central bank will shift its policy to allow rates to rise, helping strengthen the yen. In turn, this may drive repatriation flows out of U.S. securities, including Treasuries, of which Japanese investors have been key buyers for more than 25 years.


  3. 3
    U.S.-China dynamics:


    Tensions between the world’s two largest economies are already high around technology access and generative AI semiconductors. Legislation moving through Congress that could ban a major Chinese-owned social media platform from operating in the U.S. could be a further incentive for China to accelerate its efforts to reduce reliance on the dollar for trade.


The idea of “American exceptionalism” is broadly valued in global markets but it is also underpinned by a strong dollar. A weakening in the U.S. currency may create headwinds for equity multiples, in which case investors may benefit from asset and geographic diversification in their portfolios.


We encourage investors to keep an eye on the U.S. Dollar Index (DXY), which tracks the dollar’s value relative to a basket of foreign currencies. Investors may also want to consider increasing exposure to real assets, such as commodities, gold, energy- and power-related infrastructure, and real estate investment trusts (REITs). Also look to international stocks, especially in Japan, India, Mexico and Brazil.

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