The solid investment moves you can make when the dollar is softening

• The US dollar’s strength has been wavering as alternatives like gold and bitcoin soar, suggesting global investors might be hedging against US economic weakness or diversifying because of concerns about the sheer size of the US debt load.
• In Japan, signs of economic growth could lead to further interest rate rises and a stronger yen, which could prompt Japanese investors to withdraw their massive investments in US assets. It’s a shift that could notably weaken the greenback.
• Rising tech and trade tensions between the US and China could chip away at global confidence in the dollar. If China reduces its US Treasury holdings, it could further erode the dollar’s dominance and value.

The US currency tends to earn its “almighty dollar” nickname, overpowering its big and small rivals. And in recent years, it’s benefited from a godly mix: higher interest rates that’ve made its assets more tempting, some best-in-class economic performances, and its dependable status as the world’s go-to safe haven. But lately, the dollar’s halo has started to look a bit tattered, and that’s got some folks wondering if it’s headed for a fall.

Current nominal interest rates (that is, the rate before any inflation adjustments) by country, as of April 9th, 2024. Sources: FactSet, Finimize.

What are the big risks to the dollar?

Analysts at Morgan Stanley Wealth have been weighing up that very question. And they’ve pointed out three main areas to watch.

The gold and bitcoin rally.

The US dollar and alternatives like gold and bitcoin don’t really get along, historically speaking. When the greenback’s moving one way, those assets tend to head in the other direction. Take gold, which recently soared past $2,350 per ounce, up 17% in the last 12 months. Its jump suggests that China might be quietly moving its money stash from dollars to gold – a move that could continue gaining momentum. And then there’s bitcoin, the so-called digital gold, which has blasted up more than 150% in the same stretch. Both are go-to plays when things get shaky with inflation or the economy. And the fact that both are rallying like nobody’s business right now might mean investors are getting jittery about economic slowdowns or questioning whether the US will be able to keep up with its growing pile of debt.

A homecoming for Japanese money.

Japanese investors have been pouring trillions of yen into overseas markets for years, hunting for returns that beat the almost nothing levels they could get back home, thanks to the Bank of Japan’s long battle against deflation. But with Japan’s economy now showing signs of real growth, plus some relatively new inflation and wage increases, there’s a growing chance the central bank will tweak its policy to let rates rise further, potentially boosting the yen. This shift could trigger a massive pullback of funds from US assets, like Treasuries, where Japanese investors have been big players for over 25 years. With Japan’s foreign investment pot swelling to a massive 628.45 trillion yen ($4.2 trillion) by the end of 2023, the ripple effects on the dollar could be huge.

US-China unease.

Tensions between the world’s two largest economies are already high around technology and trade. And if they get a lot higher, countries might seek alternative currencies or assets that allow them to get trade done. That shift could undermine the US dollar’s status as the world’s primary reserve currency. What’s more, if China decides to sell off its stash of US Treasury bonds in response to the strain between the two countries and convert all those dollars into other currencies, the move would flood the market with greenbacks, sharply weakening the value of the US currency.

What’s the opportunity here?

You can make some savvy moves when the US dollar is weakening. Here are four that look particularly appealing right now.

Lean into US big-cap stocks. The S&P 500 is loaded with hefty companies that do lots of international business, and those firms can actually benefit from a weaker dollar. That’s because the money they make abroad becomes worth even more when it’s brought back home. Research from Bank of America estimates that a 10% dip in the dollar could mean a not-too-shabby 3% bump in S&P earnings. So you may not want to ditch your S&P 500 ETF just yet. But, if you’re investing from outside the US, it’s worth bearing in mind that a hedged ETF can help you sidestep any currency swings that might mess with your US returns.

Go for gold, precious metals, and other real assets. Gold, silver, and platinum have long been go-to assets for protecting your bottom line against a falling dollar or rising inflation. When the US currency’s value goes down, these metals usually become pricier in dollar terms, making it a win for folks invested in them. And it’s not just precious metals: oil, natural gas, and even crops follow a similar pattern. Since commodities are priced in greenbacks globally, a soft dollar means these goods cost less in other currencies, which can bump up demand and prices.

Set your course for emerging markets. Now could be the perfect time to sprinkle some international flavor into your portfolio, especially with assets from emerging markets. A dropping US dollar can give a big lift for these places since it lowers the cost of stuff they buy. Plus, many of these countries owe big money in dollars, and a weaker dollar makes it cheaper for them to service or pay back that debt. When the dollar dips, investors often chase higher returns from these markets, boosting their stock and bond markets, especially in export-heavy economies. For example, a weaker greenback generally means higher prices for goods like oil and iron ore, and that can really help a commodity powerhouse like Brazil.

Flip the script with inverse dollar funds. Needless to say, if the dollar is set to become less and less almighty, a short position on the currency would result in some potentially righteous returns.

Theodora Lee Joseph is an analyst at finimize.

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