¹ But recent market developments suggest that the dollar’s 16-year secular bull run that emerged from the 2007-2008 financial crisis may finally be losing steam. Indeed, the dollar has started to weaken even as the market now appears to expect that rates may remain higher for longer, which would typically lend support to the dollar.

Could the dollar be poised for its next secular bear market? Morgan Stanley’s Global Investment Committee believes it’s a possibility that’s at least worth considering, given the following.

¹ Commodity signals:
Commodities, which tend to be negatively correlated to the dollar, have been advancing recently. Gold, for one, has hit an all-time high of $2,183 per ounce, up 18% since last October, which may suggest investors think that economic growth is slowing. What’s more, Bitcoin, often considered digital gold, is up more than 150% over the same period. These trends appear in line with more-recent rebounds in cyclical commodities, such as oil and copper.

² Bank of Japan’s policy shift:
Since early 2021, the Japanese yen has depreciated against the U.S. dollar by about 50%. That was largely a function of widening interest-rate differentials, as the U.S. Fed raised rates aggressively while the BoJ held fast to a program of yield-curve control in an effort to keep yields lower. But given improvements in Japan’s real growth, inflation and wages, odds are rising that its central bank will shift its policy to allow rates to rise, helping strengthen the yen. In turn, this may drive repatriation flows out of U.S. securities, including Treasuries, of which Japanese investors have been key buyers for more than 25 years.

³ U.S.-China dynamics:
Tensions between the world’s two largest economies are already high around technology access and generative AI semiconductors. Legislation moving through Congress that could ban a major Chinese-owned social media platform from operating in the U.S. could be a further incentive for China to accelerate its efforts to reduce reliance on the dollar for trade.

The idea of “American exceptionalism” is broadly valued in global markets but it is also underpinned by a strong dollar. A weakening in the U.S. currency may create headwinds for equity multiples, in which case investors may benefit from asset and geographic diversification in their portfolios.

We encourage investors to keep an eye on the U.S. Dollar Index (DXY), which tracks the dollar’s value relative to a basket of foreign currencies. Investors may also want to consider increasing exposure to real assets, such as commodities, gold, energy- and power-related infrastructure, and real estate investment trusts (REITs). Also look to international stocks, especially in Japan, India, Mexico and Brazil.

² Concerned about America’s dominance over the global financial system and the country’s ability to ‘weaponize’ it, other nations have been testing alternatives to reduce the dollar’s hegemony.

As the United States and other Western nations imposed economic sanctions against Russia in response to its invasion of Ukraine, Moscow and the Chinese government have been teaming up to reduce reliance on the dollar and to establish cooperation between their financial systems.

Since the invasion in 2022, the ruble-yuan trade has increased eighty-fold. Russia and Iran are also working together to launch a cryptocurrency backed by gold, according to Russian news agency Vedmosti.

In addition, central banks (especially Russia’s and China’s) have bought gold at the fastest pace since 1967 as countries move to diversify their reserves away from the dollar.

³ Gold and silver are sought by investors for their protective hedging qualities against market volatility. These precious metals contribute to portfolio stability during uncertain times and offer hedging opportunities against other investments. This makes them beneficial choices for diversification during economic downturns, notably as gold prices tend to increase in such periods.

As such, gold and silver prove to be dependable investments amidst economic uncertainty and recessions, thanks to their capability to curtail fiat currency risks, uphold purchasing power over time, and function as an inflation hedge.

⁴ Running low on gold and facing the inability to meet its Bretton Woods obligations, the American government had to do something. Instead of cutting off gold redemption, it could have devalued the dollar in terms of gold. A decade before, British Prime Minister Harold Macmillan had suggested to President John Kennedy that the already-apparent problems could be addressed if the dollar were devalued to $70 per ounce of gold, from the official $35. Whether you have enough gold or not depends on the price. But announcing a formal devaluation was politically very unattractive and no one could really know what the right number was going forward. Today, after fifty years of inflation, it takes about $1,800 to buy an ounce of gold, which is a 98% devaluation of the dollar relative to the old $35 an ounce.

⁵ Investing in precious metals, such as gold and silver, can play a significant role in diversifying an investment portfolio and reducing overall portfolio volatility, thus achieving a balance of risk. Precious metals, like gold and silver, are regarded as safe havens during economic downturns due to their status as tangible commodities that maintain consistent demand, and their tendency to appreciate in value when demand rises during downturns.

Therefore, including precious metals in a diversified portfolio can provide a buffer against the uncertainty and volatility often associated with economic downturns. This strategy not only helps to protect assets during tough economic times but can also offer positive returns, enhancing the overall performance of the portfolio.