Dear Eoin, Does your bearish view on the US dollar imply that investors whose income and expenditure are in currencies other than the US dollar should note be holding any assets denominated in these dollars? Regards A

Eoin Treacy's view

Thank you for this question which may be of interest to the Collective. I don’t believe absolutes are helpful when thinking about a reserve currency. A major bear market in a currency could mean it loses 50% of its value over a decade. That would boost the fortunes of exporters and potentially also raise interest rates to attractive levels. That suggests some stocks would do very well while the broader market would struggle to compensate a foreign investor relative to opportunities elsewhere.

An appreciating currency and growth rates to absorb inflows are about the best conditions for share prices to appreciate. Therefore one would be well positioned to invest in those locations. That’s the primary rationale for investing in emerging markets when the dollar is declining. Over the next decade, the continued swell of young people entering the workforce and the China+ manufacturing buildout suggests some of the best candidates for outperformance will be India, Indonesia, Mexico, Brazil and other high population/commodity producing countries.
The MSCI EAFE (Europe, Africa, Far East) / MSCI World ratio has broken a 15-year relative downtrend which suggests the migration away from the USA is underway.

The long history of technology-led growth contributing to significant US outperformance suggests completely ignoring that market in favour of global opportunities would be foolhardy but the trend suggests technology investments will need to be more judicious going forward.
The Dollar Index is currently unwinding a short-term oversold condition as traders deal with the possibility there be more than one more interest rate hike before the Fed pauses.