What Should I Do With My US Dollar Exposure

While geopolitical conflict in the Middle East supports the US dollar in the short term, structural headwinds are expected to weaken it over the medium-to-long term. Investors should consider diversifying USD holdings into the AUD, CNY, and high-yielding emerging market currencies to align with future liabilities.

Key Takeaways

• 1.Near-term USD strength is currently supported by geopolitical tensions in the Middle East, specifically the US-Iran conflict and the closure of the Strait of Hormuz.
• 2.The medium-to-long term outlook for the USD is bearish due to structural headwinds like the US twin deficit and narrowing gaps between market expectations and actual Fed rate cuts.
• 3.Investors are advised to diversify away from excess USD and instead favor the Australian dollar (AUD), Chinese yuan (CNY), and emerging market carry currencies.

Table of Contents

• Key message
• 01 The US dollar has been supported by the US-Iran conflict, which has led to expectations of tighter Fed policy.
• 02 But we expect the US dollar to weaken further in the medium to long term.
• 03 Investors should manage their currency exposure.
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