What to do about the dollar’s dive

There are two ways to look at the second Trump Presidency.

• One view is that there are already only three-and-a-half years to go. Moreover, November 2026’s mid-term elections will have a big say in how much, or how little, Trump can get done. Even modest swings in those polls toward the Democrats would give them control of Capitol Hill and perhaps force the Republicans to start looking ahead to November 2028’s Presidential Election and begin to reassess their political priorities. In sum, ‘this too shall pass,’ as the old saying goes.

• The other is that ‘America first’ policies could have a major impact upon the USA, and dollar-denominated assets, and how attractive they are (or otherwise) for investors. There will be those who stay loyal, in view of the rich rewards gleaned since the Great Financial Crisis ended in 2009 (and frankly beyond then, given America’s rise to global political, economic and military dominance over the past century or so). Those who harbour doubts may have to ponder how to diversify to best effect, given that the US stock market still represents around 60% of global market capitalisation and the greenback is the world’s reserve currency.

US equities still dominate global equity market capitalisation

Source: LSEG Refinitiv data.

A clear choice between those potential scenarios will at least provide investors with a framework for deciding whether current portfolio allocations are sufficiently well balanced to protect, and have the scope to augment, their savings and wealth.

Dollar dilemma

“It is not hard to see why the dollar, as benchmarked by the trade-weighted DXY index, nicknamed ‘Dixie’, is losing ground in the second Trump Presidency.”

It is not hard to see why the dollar, as benchmarked by the trade-weighted DXY index, nicknamed ‘Dixie’, is losing ground in the second Trump Presidency.

• The White House does not seem wedded to a strong currency, and a weak one could help the plan to onshore industry by rendering exports from local manufacturing more competitive.

• Trump continues to call for lower interest rates, even though inflation is still running above the US Federal Reserve’s 2% target, more than four years after policymakers argued this was only a ‘transitory’ issue.

• Some owners of dollar assets may simply be put off by Trump’s use of executive orders, arbitrary decision making and the implications of his proposed Big Beautiful Bill, which looks set to add to a Federal deficit that is already expected to gallop higher.

The dollar continues to slide

Source: LSEG Refinitiv data.

Further dollar declines therefore are not impossible, especially as the DXY sits a lot nearer the top of its twenty-year trading range than the bottom. That said, currencies do have a habit of self-correcting, as a decline can help exports, drive growth and increase inflation, and thus force higher interest rates which should, by rights, serve to attract capital once more. Advisers and clients must also be aware that the bear case usually seems most compelling at or near the bottom.

Emerging options

“Those who do fear, or expect, a weaker dollar or believe that the post-Financial Crisis era of American exceptionalism is ending may therefore be left looking for alternatives to the USA.”

Those who do fear, or expect, a weaker dollar or believe that the post-Financial Crisis era of American exceptionalism is ending may therefore be left looking for alternatives to the USA.

Can emerging markets finally turn the corner after fifteen years of underperformance?

Source: LSEG Refinitiv data.

It may not therefore require a huge leap of imagination to see why China and Hong Kong, Brazil (and the UK and Europe) sit above the USA in terms of stock market performance in 2025 date. Emerging markets in particular have been in the doldrums for so long and they still offer long-term growth potential. Research from GaveKal and Aubrey Capital Management shows that 69 of the world’s 100 cities lie within a four-hour flight of Hong Kong, a circle that holds half the world’s population. Demographic trends are favourable, income trends are positive and technological innovation is evident in everything from China’s excellence in electric vehicle batteries to Indian prowess in software development.

“Those advisers and clients who a keen sense of market history will also be aware of the historical inverse relationship between the dollar and emerging market equities.”

Those advisers and clients who a keen sense of market history will also be aware of the historical inverse relationship between the dollar and emerging market equities. The past is no guarantee for the future, but a softer greenback has tended to help emerging markets in the past, as it eases the burden on developing economies’ overseas debts and enables them to spend the money on themselves rather than on interest for lenders.

Raw deal

“Another asset class which has tended to do well during times of dollar weakness is commodities, not least because they are priced in the US currency.”

Another asset class which has tended to do well during times of dollar weakness is commodities, not least because they are priced in the US currency. They become cheaper to non-dollar users and lower prices tend to fuel higher demand, though, again, there is no certainty this pattern will repeat itself even if the dollar does go lower.

Gold’s all-time high may be no coincidence but it may also deter contrarians from getting heavily involved now. Silver, oil and platinum, to name but three, look cheap relative to gold on a historic basis and the wider CRB Commodities index continues to outperform equities almost unnoticed, some five years after forming a bottom relative to the FTSE All-World equity benchmark.

Was 2020 the bottom for commodities’ performance relative to equities?

Source: LSEG Refinitiv data.

Past performance is not a guide to future performance and some investments need to be held for the long term.