Much weaker USD ahead?
It's time for the global economy to shake off the US Dollar wrecking ball. Risk-on means Dollar down.
Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes.
TLDR Summary
Over the past 10 years, the US Dollar has been remarkably strong. It has outperformed most other major currencies. And the US stock market has outperformed the global stock market in its slipstream. When the US Dollar is strong, it’s natural that companies with a lot of US Dollar cash flow outperform.
Various forces have converged to make that possible, including a) the emergence of a world dominating technology industry, b) an energy production boom that strengthened the competitiveness of various industries and greatly improved the country’s trade balance, c) a favorable demographic environment and last but not least d) the Fed’s tightening leadership during the toughest inflation battle in decades.
Over the past decade, the US have been like a giant vacuum cleaner for capital from all over the world. This has accelerated since the pandemic. As a result, institutional asset allocations to the rest of the world are low. Eurozone and emerging markets are among the most hated asset classes. However, there have been some signs of life recently. Allocations are still low, but investors have ploughed money into them hand over fist over the past month. This may be an early sign of a larger asset rotation.
The US Dollar typically underperforms during times of global prosperity. It’s a safe haven during risk-off periods that will underperform in risk-on periods like 2006/07, 2012/13, 2017 or 2021. 2024/25 is shaping up to rhyme with those times.
Potential catalysts would find a fruitful ground from a valuation perspective. The US Dollar is overvalued. It’s consensus opinion, but it’s also objectively true. From a purchasing power perspective, it could easily depreciate by 10% and still incorporate a justifiable premium to take the competitive strength of the US economy into consideration.
International assets would outperform in such a scenario. But it would likely help the US stock market as well. A broad 10% US Dollar depreciation would likely boost earnings of US companies by 4% which would shave off about 1x from the S&P’s elevated P/E ratio. The US stock market would still appear richly valued in that scenario. But this may be one piece to the puzzle to help justify the recent momentum.