How to Deal with a Weak Dollar: Is It Better to Sell Dollar Assets or Hedge Against Currency Fluctuations?

Since early 2025, the dollar has fallen by 8%, with Goldman Sachs predicting that this trend will continue. When facing a persistent decline in the dollar, Goldman Sachs believes that hedging against currency fluctuations is more effective than directly selling dollar assets.

On August 2, according to the latest research report from Goldman Sachs, the dollar has dropped by 10% against major economies since early 2025, with a trade-weighted basis of 8%. Although the dollar rebounded slightly in July, it is expected that the depreciation trend will resume. However, historical data shows that the performance of other assets during periods of dollar weakness may be significantly different, depending on specific factors driving the decline.

Goldman Sachs analysts Dominic Wilson and Vickie Chang point out in their latest research report that if the dollar continues to weaken, diversifying stock investments, reducing US market exposure, and potentially benefiting emerging markets assets, all have a certain rationality. However, hedging against currency fluctuations is more valuable than simply cutting down dollar assets.

Goldman Sachs believes that persistent dollar depreciation is more likely to stem from investors' reduced willingness to reconfigure their US asset exposures and potential dovish shifts in monetary policy. These factors driving the decline of the dollar itself will not pose significant risks to US stocks or bonds.

Historical Experience: Asset Performance Diverges Significantly During Dollar Depreciation

According to data, since 1980, the actual trade-weighted dollar index has at least experienced 7 instances of over 10% depreciation. Through analyzing these historical periods' asset performance, Goldman Sachs found that except for foreign exchange markets or gold, other assets' patterns exist significantly different.

In periods of dollar depreciation, US stocks tend to rise more often, but often lag behind overseas markets when priced in dollars, but in developed markets, this lag is usually small, and after hedging against currency fluctuations, US stocks do not actually lag.

In periods of dollar depreciation, US bond yields and yield spreads have both risen and fallen, showing no fixed relationship between dollar decline and interest rate movement.

Worth noting is that gold has always recorded gains in all instances of dollar depreciation, reflecting its currency properties within the commodity system. Other commodities such as oil, although more frequently rising, exhibit less consistent performance.

Macro Factor Analysis: Three Key Factors Drive Dollar Trends

Goldman Sachs built a model based on US stocks, bonds, and the dollar in their research report, extracting three factors: "US growth," "US monetary policy," and "non-US/risk premium." Research found that although market expectations of US growth may not be consistent across all instances of dollar depreciation, all instances involve dovish shifts in Federal Reserve policy or rising US asset risk premiums.

This year's events have verified this analytical framework: US growth concerns, Fed policy tightening expectations, European growth outlook improvements, US fiscal sustainability concerns, and Fed independence concerns, all driving the dollar downward from different angles, but with varying impacts on other assets.

In detail:

US growth concerns typically lead to a decline in both the dollar and stocks, while also putting downward pressure on bond yields.

Fed policy tightening expectations will weaken the dollar, while reducing US yields and lifting stocks.

European growth outlook improvements, although weakening the dollar, are accompanied by rising stock prices and bond yields.

Investment Strategy: Hedge Beats Sell

Based on historical analysis and current market conditions, Goldman Sachs has outlined a clear investment recommendation.

Goldman Sachs believes that investors' continued reduction in their willingness to reconfigure US asset exposures will lead to further structural dollar depreciation. Under the baseline scenario, Federal Reserve policy may also be more dovish than expected. These factors driving the decline of the dollar itself do not pose significant risks to US stocks or bonds.

For stock investments, Goldman Sachs indicates that if the dollar continues to weaken, there is indeed a rationality for diversifying and reducing US market exposure, with emerging markets assets potentially benefiting under the baseline scenario. However, hedging against currency fluctuations has more convincing arguments than simply cutting down US stocks.

Goldman Sachs also specifically points out that around the structural risks surrounding US fiscal policy or Federal Reserve independence may become more pronounced in pushing the dollar further downward while potentially lifting yield curves and posing certain risks to US stocks.