How should investors prepare for a weaker USD?

The first half of 2025 saw the worst performance of the U.S. dollar (USD) in over 50 years. This comes on the back of an extended, multi-year period of USD strength. By its peak in January this year, the U.S. dollar had risen almost 50% in inflation-adjusted terms against a trade-weighted basket of currencies of major U.S. trade partners from the low in July 2011. The outlook for a structurally weaker USD in the coming years means that investors are likely to have to unlearn the lessons of the past 15 years and plan accordingly.

Before we discuss the implications of USD weakness, let’s examine its drivers. The starting point is its overvaluation. According to the Bank for International Settlement’s measure, even after the sell-off so far this year, the USD real effective exchange is trading around the previous peak level of February 2002.

The second driver is the USD’s reserve currency status. For decades, the USD has been seen as the world’s pre-eminent reserve currency because of the U.S.’ deep capital markets, strong regulatory infrastructure and predictable policymaking institutions. However, the latter two factors have clearly been eroded quite significantly over the past six months. This is not to say the USD’s reserve currency status is really under threat – there is no clear competitor – but its advantage is slowly being chipped away.

The third driver is the U.S.’s balance of payments position. The U.S.’s net international investment position has deteriorated sharply in recent years. Here, former President Biden’s fiscal stimulus following the COVID pandemic played a significant role by creating excess domestic demand, resulting in a wider current account deficit. This means the U.S. has to attract huge amounts of capital inflows from abroad just to stop the USD from weakening.

Implications of a weaker USD

Against this backdrop, what would a weaker USD mean for investors?

There are three angles to look at here: portfolio construction, managing FX risk practically and the emotional aspect of the impact of FX movements on returns.

The first question is the easiest to answer. We can summarise the impact of a weaker USD as 1) typically positive for most investments and 2) particularly, the outperformance of non-U.S. assets over U.S. assets.

Therefore, the first defence against USD weakness is to be invested, especially in equities and gold. A weaker USD also argues for reducing exposure to U.S. equities, and indeed we have trimmed our U.S. equity allocation in our globally diversified portfolio.

The arguments in favour of this approach are high valuations, the extremely high weight of U.S. stocks as a percentage of global market capitalisation and the uncertain impact of U.S. import tariffs on corporate profitability. After all, the tariffs will be ‘paid for’ by an uncertain mix of i) exporters who will have to reduce prices, ii) U.S. producers who will have to absorb some of the tariffs, thus hurting profit margins, and iii) consumer who will have to pay increased prices.

However, the U.S. is still the world’s biggest equity market and the source of a lot of innovation. Meanwhile, U.S. equities generally do better in a weak USD environment than in a strong USD environment. Therefore, we retain a significant allocation to U.S. equities in our portfolios. What it does mean is that we have increased our allocation to non-U.S. equities, primarily via an increased allocation to Asia ex-Japan equities.

Should we hedge USD exposure?

The second question is whether to hedge the USD currency exposure emanating from your portfolio. For equities, we generally do not think this makes sense as a lower USD should boost U.S. corporate earnings as overseas profits get translated into a weaker currency.

For USD bonds and USD-denominated deposits, it is more difficult to answer. Naturally, the potential returns for bonds are generally lower than for equities and therefore currency fluctuations can really make a big difference to returns in your own currency. However, you also need to factor in the hedging cost, which can be significant. Therefore, hedging USD bond exposure is certainly something to consider. However, you should approach it in a measured fashion, perhaps taking advantage of short-term bouts of USD strength to increase hedge ratios.

An obvious aside is that it makes sense for any deposits to be diversified across different currencies and not just in USDs.

Managing emotions

The final part of managing currency fluctuations is how to manage your emotions. I think we all understand that a diversified foundation portfolio, which includes overseas investments, is important and that this comes with currency risks. There will be times when the portfolio is doing well in one currency, but not in another, especially over shorter periods of time.

The way I manage this is to look at my portfolio over time in terms of different currencies, such as the USD, GBP and SGD. This gives several perspectives of the performance of the portfolio. Of course, if there is an equity bear market, then all three versions of the portfolio are likely to be lower in value, but it does give some sense as to how much of the movement is down to pure FX movements. This may keep you from over-reacting to portfolio fluctuations measured in one currency, but also highlight where you might have an excessive currency exposure that you should be managing over the longer term.

As with all aspects of investing, these decisions are very personal. The key is to try to decipher short-term fluctuations and long-term trends. A weaker USD environment is something we have not been used to for a long time and will have significant implications for different asset classes. However, tweaks to your investment style are in order – by slightly reducing your exposure to USD-based assets – rather than a massive overhaul.

Disclaimer

This article is for general information only and it does not constitute an offer, recommendation or solicitation of an offer to enter into any transaction or adopt any hedging, trading or investment strategy, in relation to any securities or other financial instruments. This article has not been prepared for any particular person or class of persons and does not constitute and should not be construed as investment advice or an investment recommendation. It has been prepared without regard to the specific investment objectives, financial situation or particular needs of any person or class of persons. You should seek advice from a licensed or an exempt financial adviser on the suitability of a product for you, taking into account these factors before making a commitment to purchase any product or invest in an investment. In the event that you choose not to seek advice from a licensed or an exempt financial adviser, you should carefully consider whether the product or service described herein is suitable for you.

You are fully responsible for your investment decision, including whether the investment is suitable for you. The products/services involved are not principal-protected and you may lose all or part of your original investment amount.

Standard Chartered Bank (Singapore) Limited will not accept any responsibility or liability of any kind, with respect to the accuracy or completeness of information in this article.

Singapore dollar deposits of non-bank depositors are insured by the Singapore Deposit Insurance Corporation, for up to S$100,000 in aggregate per depositor per Scheme member by law. For clarity, these investment products are not deposits and do not qualify as an insured deposit under the Singapore Deposit Insurance and Policy Owners’ Protection Schemes Act 2011. Foreign currency deposits, dual currency investments, structured deposits and other investment products are not insured.

The information stated in this article is accurate as at the date of publication.