In this article, we explore the implications of a weakening US dollar for globally diversified portfolios, questioning the continued reliability of the “dollar smile” as a source of downside protection.
We also examine how shifting sentiment among discretionary fund mangers (DFMs) may signal a need for more adaptive portfolio construction strategies in an increasingly uncertain macroeconomic environment.
Key Takeaways
- The Dollar Smile Under Pressure: The US dollar has historically performed well in both risk-on and risk-off environments, but recent drawdowns have challenged this pattern. The dollar's failure to rally during the Q2 2025 equity correction raises questions about the longevity of it's safe-haven status.
Sentiment Shift Among DFMs: A dramatic swing in sentiment, driven by fiscal imbalances, policy uncertainty and geopolitical tensions; has made the dollar the most negatively related asset in ARC's latest Market Sentiment Survey. This shift could have material implications for portfolio risk management.
Rethinking Diversification: Traditional diversifiers like government bonds and the US dollar may no longer offer the same protection during market stress. DFMs may need to consider more complex tools such as volatility-linked instruments, to manage drawdowns and maintain portfolio resilience.
)