Market Musings 240126

US dollar at a critical juncture

Weekly Podcast and Snapshot:
Infrastructure: Laying the foundation for growth

Infrastructure is the economic backbone linking people, goods, data and markets. Recent years have seen a rapid evolution of the sector sustained by robust economic growth and breakthrough technologies, sparking strong investor appetite.

Today’s demand is powered by three key forces: (i) digitalisation and electrification (AI‑driven data centers, EV‑charging networks), (ii) renewed government commitments, and (iii) the need for assets that hedge geopolitical and macro‑economic uncertainties.

AI, 5G networks, cloud computing and EV‑charging are spurring a massive build‑out of hyperscale data centers, and a resilient power grid. In parallel, the electrification of transport and heavy industry fuels unprecedented demand for both conventional and clean‑energy generation, transmission and battery storage. This propels record‑level investment across the entire infrastructure sector.

Similarly, governments are putting in place spending plans to revive and upgrade their infrastructure driving major infrastructure investment.

Finally, infrastructure is emerging as a natural inflation hedge with low correlation to the public markets providing investors the hedge they need in times of uncertainties.

US dollar: teetering on the edge of a breakdown?

This has been a potentially pivotal week for the US dollar. Several factors have driven recent weakness in the US dollar against other major currencies and against gold, including:

• Lower US rates: Further expected Federal Reserve interest rate cuts (at least 2 more cuts this year), undermining the attractiveness of holding cash on deposit in US dollars as US interest rates converge on those available elsewhere such as in Europe or the UK;
• Fed leadership uncertainty: while Trump’s choice for the next Fed President (current Fed President Jerome Powell’s term ends in May) remains unclear, there is nervousness that the new Fed President will have to bow to Trump’s wishes and lower interest rates perhaps more than is prudent from a purely economic point of view. This potentially undermines the independence of the Fed, by extension undermining the status of the US dollar as a safe haven asset to be preferred in times of crisis.
• Structural difficulties around current account and budget deficits: President Trump seems set on increasing US Federal spending in order to boost household spending, thereby picking up votes ahead of November’s crucial mid-term elections. A persistently large US budget deficit (gap between tax receipts and government spending) is expected this year, of the order of 6-7% of GDP (close to USD 2 trillion). This excessive spending needs to be financed by borrowing even more money in the bond markets, pressuring the US dollar over the long term as the sustainability of US federal debt is called into question.
• Geopolitical uncertainty: US foreign policy has raised the global political temperature dramatically in recent weeks. Trump’s alienation of European allies over the issue of Greenland and his extraction of Maduro from Venezuela, plus continued exertion of pressure on the Iranian leadership with the sending of US aircraft carriers to the Middle East, leaving open the threat of military action against the Iranian regime. In my view, this all undermines the status of the US dollar as other countries then prefer to hold other assets rather than US asserts in dollars. Here, gold is the clear alternative that has benefited from greater US-centric geopolitical volatility and unpredictability

Of these arguments, I believe that it is the last that weighs most heavily on the US dollar at present.

The starting point is that of a US dollar that remains strong compared to history according to the Federal Reserve US dollar index, despite the weakness seen last year.

Long-term US dollar index: Still high versus history

If we look at the DXY US dollar index, we can see that the US dollar has suffered 2 major drops since peaking in 2022. On this chart, the key level seems to be 96.7 for the DXY, below which accelerating weakness could potentially be seen.

US dollar takes a dive this week

In many currencies such as the Swiss Franc and Swedish Krona, the US dollar looks already to be in a down trend. 

The risk to US assets held by non-US investors

As of mid-2024, non-US investors held a massive USD 31.3 trillion in US financial assets, including USD 17 trillion in US stocks and USD 13 trillion in US bonds of various types. Today’s total is likely to be far larger still, given the strength of the US stock market since then.

The US has been the investment destination of choice for over a decade given the combination of a stronger US dollar and strong US stock market performance, led by US large-cap technology companies.

As an example of how the US has come to dominate the investment world in recent years, consider that a broad global stock market index such as the MSCI ACWI (All Country World Index) was 40% composed of US stocks in 2011. By 2025, this proportion invested in the US had risen to 63% thanks to the outperformance of US tech stocks and the dollar. The next largest country weighting is in Japan at under 5%, less than 1/12^th of the US weighting.

MSCI All-Country World Index Country Weightings (end-2025)

A good question to ask today is whether such a global stock market index can truly be called diversified when so much of its assets are held in 1 country, 1 currency and overwhelmingly in one sector, technology.

A breakdown in the US dollar could prompt foreign investors to start to sell down their US holdings and repatriate assets, leading to huge outflows from the US dollar into their home currencies (e.g. euro, yen, pound, Canadian dollar, Korean won).

I believe that any such repatriation flows would be slow and steady and last years rather than days or weeks. But it would have a circular effect: a weaker dollar (and underperformance of the US stock market versus the world ex US) would prompt selling of US stocks and repatriation of the cash, creating selling pressure on the US dollar and potentially then further weakness.

There is little evidence that European, Japanese or Canadian institutional investors have been drastically reducing their investments in the US as of yet, but it is a risk for the future.

Recent performance continues to favour World ex US over US

As of Friday 23 January, 2026, US stocks have underperformed European stocks by a wide margin since the start of 2025 (+4% for US stocks in euros versus +24% for Europe including the UK, a 20% gap) due to differing stock market performance in local currencies, plus a 10% depreciation of the US dollar against the euro.

STOXX Europe (blue) v S&P 500 (in euros, green)

Even for US-based investors, emerging market stocks have been a far better motor of performance (+41%) than the S&P 500 index (+18%) over the last year:

MSCI Emerging Markets (in USD, blue) v S&P 500 index (green)

Where to be invested when the US dollar is trending lower

In a weaker dollar environment, assets with foreign-currency or real-asset exposure tend to benefit most.

• Non-US equities and bonds: International equities (developed and emerging markets) often gain for a dollar-based investor, because local stocks can rise and their currencies appreciate versus the dollar.
• Commodities and precious metals: Commodities priced in dollars, especially gold and other precious metals, often rise when the dollar weakens because they become cheaper in other currencies and are used as an alternative store of value.
  Broader commodity baskets (energy, industrial metals, agriculture) also tend to benefit as global demand improves and the weaker dollar eases financial conditions for many importing countries.
• Select foreign currencies: Currencies of economies with relatively strong fundamentals and higher real yields (for example some G10 and emerging-market currencies) are positioned to appreciate against an overvalued dollar.
  Strategists highlight the Japanese yen, Scandinavian currencies, and a range of emerging‑market currencies as likely beneficiaries if dollar weakness persists.

I would favour two areas right now:

• Precious and strategic industrial metals: gold has been the obvious choice, just hitting USD 5000/ounce for the first time this week. Despite the sharp rise in price, I would hold onto physical gold exposure at this point, given its diversifying properties particularly in times of crisis and geopolitical uncertainty. Central banks continue to amass physical gold as they reduce their US dollar holdings in their monetary reserves.
  I would also favour copper, aluminium and other industrial metals such as lithium necessary for electrification, technology and in particular for the data centre buildout that we are seeing in the US and globally. Demand growth is clear, while global supply of these metals struggles to keep up.
• Latin American stocks: these should benefit from growing economies and strengthening currencies, lower interest rates as their central banks follow the Fed in cutting rates, commodity exposure in their economies and stock markets and relatively low valuations.

LTAM Latin America ETF has been a star performer in 2025-26

But could still have a long way to go… Long-term chart of Latin America ETF (in $)

Have a great week ahead,

Edmund