How to deal with a weak dollar: is it to sell dollar assets, or hedge against the dollar exchange rate?

Since the beginning of 2025, the US dollar has fallen by 8% from its peak, and Goldman Sachs expects this trend to continue. When faced with the continued weakening of the US dollar, Goldman Sachs believes that hedging against US dollar exchange rate risk is more effective than directly selling US dollar assets. On August 2nd, according to the Wind Trading Station, Goldman Sachs stated in a recent research report that since the beginning of 2025, the US dollar has fallen by 10% against the currencies of developed economies, with an 8% decline on a trade-weighted basis. Although the US dollar rebounded from its lows in early July, the depreciation trend is expected to resume. However, historical data shows that asset performance during periods of US dollar weakness may vary significantly, depending on the specific driving factors behind the weakening of the US dollar. Goldman Sachs analysts Dominic Wilson and Vickie Chang pointed out in their latest research report that if the US dollar continues to weaken, diversifying equity investments and reducing allocation to the US market may have some rationale, with emerging market assets potentially benefiting. However, the strategy of hedging against US dollar exchange rates is considered more valuable than simply reducing US dollar assets. Goldman Sachs believes that continued structural depreciation of the US dollar is more likely to stem from investors reducing their willingness to allocate marginal assets to the US, as well as potential dovish shifts in Federal Reserve policy. These factors driving US dollar weakness themselves are not expected to pose significant risks to US stocks or bonds. Historical experience: Significant differences in asset performance during US dollar depreciation periods Data shows that since 1980, the real trade-weighted US dollar index has experienced significant depreciation of over 10% at least seven times. By analyzing the performance of assets during these historical periods, Goldman Sachs found that aside from the foreign exchange market itself or closely related assets such as gold, the performance of other assets exhibited significant differences. During periods of US dollar depreciation, the US stock market mostly saw gains, but often underperformed in dollar terms compared to foreign markets. However, in developed markets, this underperformance was usually minimal, and after hedging for currency effects, US stocks actually did not underperform. During US dollar depreciation periods, US bond yields and yield differentials both experienced increases and decreases, indicating that interest rate trends did not have a fixed relationship with US dollar weakness. It is worth noting that gold has recorded gains in all US dollar depreciation periods, reflecting its monetary properties within the commodities system. While other commodities such as oil saw higher frequency of gains, their performance consistency was relatively poor. Analysis of macro driving factors: Three major factors influencing the US dollar trend Goldman Sachs constructed an analysis model based on the three assets of US stocks, US bonds, and the US dollar, extracting the three factors of "US growth," "US monetary policy," and "non-US/risk premium." The research found that while market expectations for US growth varied during various US dollar depreciation periods, all US dollar depreciation periods involved a shift to a dovish Federal Reserve policy stance and a combination of rising US asset risk premiums or positive non-US factors. Several events this year have confirmed this analysis framework: concerns about US growth, expectations of a dovish Federal Reserve policy shift, upward revisions in European growth expectations, concerns about US fiscal sustainability, and concerns about Federal Reserve independence, all from different perspectives have contributed to US dollar weakness, but their impact on other assets varies. Specifically: Concerns about US growth often lead to weakness in both the US dollar and US stocks, putting downward pressure on US bond yields. Expectations of a dovish Federal Reserve policy will weaken the US dollar, while also lowering US bond yields and raising US stock prices. Although improvements in European growth prospects may weaken the US dollar, they are accompanied by increases in US stock prices and US bond yields. Investment strategy: Hedging is better than reducing Based on historical analysis and current market conditions, Goldman Sachs has put forth clear investment recommendations. Goldman Sachs believes that investors' continued reduction in willingness to allocate marginal assets to the US will lead to further structural US dollar depreciation. Under the base scenario, Federal Reserve policy may be even more dovish than expected. These drivers of US dollar weakness may not necessarily pose significant risks to US stocks or bonds. Regarding equity investments, Goldman Sachs states that if the US dollar continues to weaken, there is indeed rationale for diversifying investments and reducing allocation to the US market, with emerging market assets potentially benefiting under the base scenario. However, considering that in many periods of US dollar weakness, returns on US stocks hedged with foreign currencies have been comparable to global markets, the argument for hedging US stock allocations with foreign exchange is stronger than the argument for reducing US stocks. Goldman Sachs also specifically points out that deeper structural risks around US fiscal policy or Federal Reserve independence may become more prominent, further pressuring the US dollar while potentially raising yield curves and posing certain risks to US stocks. These tail risks are key reasons why positioning for US dollar depreciation in investment portfolios may be independently useful, while also reinforcing the need to diversify investments moderately into non-US assets. This article is a reprint from "Wall Street Seen News", author: Dong Jing; GMTEight editor: Yan Wencai.