Turning Point for 15-Year Strong Dollar Era... Global Asset Allocation Enters a New Phase

Yonhap News Agency

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A global equity management firm under Franklin Templeton, a world-renowned asset management company with over 75 years of history, has predicted that the 15-year-long strong trend of the US dollar may be reaching a turning point. The analysis suggests that the dollar's status as a safe-haven asset is beginning to waver, as evidenced by the decline in the Dollar Index (DXY) even when the US stock market falls.

On October 1, Clearbridge Investments, a global equity management firm under Franklin Templeton, released a report titled "Will the Dollar Stop Here?" outlining this perspective.

According to the report, the Dollar Index (DXY), which represents the value of the dollar, fell by 10.7% in the first half of this year, marking its worst half-year performance since the 2008 global financial crisis. Even compared to all half-year performances since 1967, this ranks in the bottom 10%. Although the dollar stabilized over the following months, suspicions have arisen that this may be a signal of a "regime shift," indicating a structural transition to a weaker dollar phase.

Since 2010, the dollar has been favored as a safe-haven currency. During five periods when the S&P 500 Index plunged more than 15%, the Dollar Index rose by an average of 7.2%. However, earlier this year, when the S&P 500 Index dropped by 18.9%, the Dollar Index fell by 3.9%, marking the first time it weakened during a risk-off phase.

The report identifies the primary cause of this weakness as the expansion of currency hedging by foreign investors. According to US Treasury statistics, foreign investors purchased 147 billion dollars' worth of US Treasury bonds in May this year, the second-largest amount since 1977. After a slight capital outflow from the US stock market in April, foreign capital flowed in strongly during May and June, leading to a rebound. The report concluded that, since there has not been a large-scale capital outflow from the US, currency hedging has been the main factor behind the current dollar weakness.

Josh Jamner, Senior Investment Strategy Analyst at Clearbridge Investments, explained, "If the expansion of currency hedging by foreign investors becomes the 'new normal,' the proportion of currency hedging will increase according to new risk management standards," adding, "This could ultimately act as a headwind for the dollar."

The "twin deficits," represented by fiscal and current account deficits, were also cited as structural burdens. Since mid-2009, the cumulative US twin deficits have exceeded 11 trillion dollars. Due to the recently passed "One Big Beautiful Bill (OBBB)," the US fiscal deficit is expected to remain at 6-7% of GDP for the time being. In contrast, the report pointed out that other major countries still have fiscal expansion capacity, making the US's constraints more pronounced.

However, the report also noted that this weakness could be due to cyclical rather than structural factors. President Donald Trump's tariff policies shook investor sentiment in the short term, but tensions eased after trade agreements were signed later in the summer. In addition, the structural strengths of the US continue to support the dollar. In particular, the US has the world's largest data center infrastructure in the field of artificial intelligence (AI), and productivity gains could support the dollar. Furthermore, considering China's deflationary pressures and the undervaluation of the Japanese yen, the report assessed that the likelihood of the dollar weakening excessively against major Asian currencies is limited.

Jeff Shultz, Head of Economic and Market Strategy at Clearbridge Investments, said, "Given the close correlation between the dollar and equity returns over the past 50 years, the direction of the dollar will have a significant impact on which regions lead the global equity markets going forward," and advised, "Regardless of whether a regime shift has begun, it is clear that investors should reconsider their allocation to non-US equities and expand global diversification."

Jeff Shultz Clearbridge Investments Head of Economic and Market Strategy

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