The US dollar is unlikely to continue its 16-year run of steady appreciation and will continue to weaken for the foreseeable future, requiring action from investors who want a hedge against that downturn or to benefit from its depreciation, according to investment firm T Rowe Price.
T Rowe Price multi-asset division capital market strategist Tim Murray said there were four reasons for the changing state of the greenback comprised of structural and cyclical forces that indicate current events are more than just a short-term correction.
“First, fiscal concerns are increasingly weighing on the currency. The sheer size of the US national budget deficit is adding pressure to the dollar as debt levels continue to rise,” Murray said.
“Second, monetary policy expectations are turning into a clear headwind.
“Markets are increasingly pricing in the possibility of further interest rate cuts from the Federal Reserve, particularly under the assumption the incoming chair nominee, Kevin Warsh, may adopt a more accommodative stance than the current chair, Jerome Powell.
“With most other major central banks already nearing the end of their easing cycles, the resulting narrowing in interest rate differentials is causing the dollar to weaken.”
He added US political actions were also impacting overseas demand for dollar assets and shifts in US foreign policy have caused some countries to diversify reserves toward other currencies and gold, which in turn has further reduced demand for the dollar.
“Finally, global capital flows are acting as an additional drag. When equity markets or asset values outside the US outperform, capital naturally shifts toward those regions. Gold has also been a key beneficiary of this rotation,” he noted.
“From a valuation standpoint, the dollar also remains elevated relative to its own history and against most major currencies. Even after recent weakness, it is still expensive by historical standards.”
While investors may not have direct exposure to or holdings of the US dollar, they should consider what action to take where they have indirect exposure, he said.
“For investors considering ways to potentially hedge against a weaker dollar, increasing exposure to non-US assets may offer diversification benefits,” he stated.
“Emerging market and local-currency bonds can benefit directly from dollar depreciation, while international equities offer both equity returns and potential currency gains.
“After years of dollar strength prompting some investors to reduce international exposure, a sustained period of dollar weakness could encourage a reallocation back toward global markets.”