Weaker Dollar: Implications for Portfolios

Whilst there have been structural and trading shifts driving Dollar weakness, there is downside risk to Sterling too.

---

How to navigate Dollar weakness, and where next for Dollar/Sterling?

​Subscribe to our weekly newsletter to get all our insights to your inbox (for UK financial advisers only)
 
Weaker Dollar Implications for Portfolios
By Henry Cobbe CFA, Head of Research, Elston Consulting

Is the US Dollar in Structural Decline?

For years, the strength of the US dollar has been a pillar of global financial stability, underpinning trade, commodity pricing, and global central bank reserves. However, in early 2025 with Trump’s tariff war, the dollar experienced a sharp and rapid decline. For some this was an acceleration of a broader de-dollarisation trend.  However the extent and pace of the fall in 1h25 was also a function of massive institutional hedging activity rather than fundamental shifts in the Dollar’s status as a global reserve and trading currency.  As institutional investors sold the Dollar to hedge returns back into local currencies for the first time in ages – this was not necessary in a strong or stable currency regime.  This created a temporary but intense selling pressure.  So it was more of a sudden step-change, than a marked decline in the Dollar’s relevance.  The world is now adjusting to this weaker Dollar environment.

The Risk to the Dollar Hereon and the Greater Risk to Sterling

​Looking ahead, while the Dollar may face continued pressure from de-dollarisation trends, the greater concern lies with Sterling. The pound’s apparent strength in early 2025 was merely a flipside of dollar weakness, not a reflection of UK economic resilience. With the UK’s fiscal position deteriorating, Sterling faces significant downside risk – moreso than the Dollar, in our view.  Furthermore, Sterling is not a global reserve currency and does not need to be held by international investors.  We explored this recently in our article Currency Conundrum.  Thus, within Bond portfolios we have been recommending our clients to tilt away from Sterling and towards the Dollar.  Where else? Swiss Francs or Euros would not be as relevant for UK investors.  Some believe that a weaker Dollar is a tacit policy step described as the “Mar-A-Lago Accord.”

What is the Mar-A-Lago Accord?

The so-called “Mar-A-Lago Accord” is a concept – not an official policy – referenced in a research paper by Stephen Miran, that calls for a deliberate devaluation of the dollar to reduce the trade deficit, stimulate US manufacturing and reduce the real value of its sovereign debt with links to security agreements.  We explored this topic in detail in March 2025.  For some, idea of a coordinated dollar weakening has added fuel to concerns about the resilience both of fiat currency and of US Government debt.  Fiat currency means currency not backed by Gold.  For US investors, the alternative to “fiat” or trust-based government currencies and debt securities, is traditional “real” currencies such as Gold and – for some – “new” currencies such as Bitcoin. ​

Debt Indigestion in the US and the UK

Both the US and UK face challenges from oversupply of sovereign debt, but the UK is in a more precarious position, creating the risk of the unanchoring of long-dated Gilts yields. While the US economy continues to deliver growth, the UK’s fiscal outlook is challenging with the relationship between growing, borrowing, taxing and spending look strained.  “Debt indigestion” has been one of our key themes for 2025 and describes the risk that the market will not absorb the volume of debt issuance, or will demand a higher return (rising yields) for holding longer-dated debt because of deteriorating credit quality, sticky inflation and oversupply. Long-dated bonds are particularly vulnerable to shifts in interest rate expectations and inflation.  This week, UK 30 year gilts have hit 5.6% - levels above not seen since 1998.
This is why we earlier recommended our clients to reduce their allocation to Bonds in favour of Alternatives, and within Bonds, to dial down duration (interest rate sensitivity) by focusing on short-dated bonds.

What recommendations have we made to investment committees of financial adviser firms in face of Dollar weakness?

Equities:

Partial currency hedging of global equity exposure to GBP would helped in 1h25, though the timing of currency hedge share classes is very difficult to implement given currency volatility and fund dealing cycles. A hedge was implemented in September 2024 on rising relative rate differentials but removed slightly too early.  Given the outlook for Sterling, we would not recommend chasing it at this stage.  Instead we have been proactive within Equities as regards rotating between Factors (between Value, Min Vol and Momentum) and also tilting towards Sectors with structural tailwinds such as Defence.  This way we can navigate concentration risk, avoid value traps and not try and market-time the currency aspect.

Alternatives:

Given the risk to nominal Bonds, we have recommended advisers/managers to decrease their allocation to Bonds and increase their allocation to Alternatives – such as gold, infrastructure, and absolute return strategies.  We are also looking at considering digital assets pending FCA rule changes in October 2025.

Bonds:

Within the reduced Bond allocation, we have recommended shortening duration, and tilt currency exposure from sterling to dollars. Shorter duration helps mitigates interest rate and inflation risk while diversifying currency exposure away from Sterling.  A traditional static allocation to GBP-hedged global bonds makes any defensive/diversifying currency tilts a challenge.

Summary

We see the Dollar as remaining the primary global reserve currency, albeit at slightly lower exchange rates.  The currency conundrum means that there has not been a flight to the safety of the Dollar in 2025 as is usually the case.  Whilst the outlook for the Dollar is mixed, the outlook for Sterling is worse.  For diversification purpose, we advocate a 1) an agile approach to Factor investing within equities 2) a greater allocation to Alternatives in place of Bonds which can incorporate both traditional new “real asset” exposures in a highly liquid format and 3) a tilt away from Sterling within the ​Bond allocation.