After years of continued US dollar strength, the currency has declined some 10% year-to-date, as measured by the US dollar index (DXY).
This decline was exacerbated by the uncertainty brought about by President Trump’s tariff announcements in April, prompting global investors to start rethinking their US exposure.
But this broadly bearish consensus towards US assets could mean that in the short run, US assets could “melt up” as investors reposition, according to Standard Chartered Bank global chief investment officer Steve Brice.
“Obviously a lot of people are worried about how far the dollar could go; our view is that the market is massively underweight the dollar and US assets,” he said at the Bloomberg Invest conference in Hong Kong on Wednesday.
“So we could still see, in the short term, a melt up or climbing the wall of worry for US assets, until that positioning corrects itself.”
While Trump has said he would prefer a weaker US dollar to improve the nation’s export competitiveness, he does not want the US Treasury market to crash, so “there is a bit of a trade-off for what they are trying to achieve,” Brice said.
Invest to hedge against US decline
But for investors who want to position for a continued decline in the US dollar, the solution is to, counterintuitively, invest in assets, including US assets, according to Brice.
He said: “If I need to hedge against long term dollar weakness — let’s say you take a view of the US dollar going to decline another 10% over the next 12 months — then what do you do? Actually, you invest.”
Most investors tend to hunker down, lean into short duration assets and wait out the uncertainty, but Brice suggested this isn’t the best approach.
He said: “If you’re worried about dollar weakness, you should be invested because dollar weakness is very good for assets, generally, both equities and bonds.”
“That is usually a great way to hedge against dollar weakness, and that includes US assets, not just emerging markets, although obviously in that environment, historically non-US generally outperforms US assets.”
Diversification is finally resonating with wealth management clients
While in the past wealth management clients were hesitant to diversify out of their US assets which had been outperforming, they are becoming more open-minded about diversifying away their US exposure.
This is according to Bank of Singapore’s global chief investment officer Jean Chia who said at the same conference that diversification has finally started to resonate with the bank’s wealth management clients.
“Previously, we were preaching the message of diversification, and it was always ‘but my dollar assets are doing very well, the US market has returned exceptionally for the past few years, why should I change?’ Increasingly, this now lands better for wealth clients,” she said.
“The typical wealth management client in Asia has a home currency, such as Thai baht, Indonesian rupiah, Chinese yuan, but typically their global investments are US denominated.”
“We are now postulating with clients that it is not a binary decision, dollar versus home currency, but what is that third currency? Is it the euro, the yen, or the Singapore dollar?”
