Zacks Investment Management

Dollar Doom? Markets are Telling a Different Story

Headlines have been buzzing over the last several weeks as gold and other “hard” assets have sprinted higher. The rally has been accompanied by a familiar storyline: investors are supposedly fleeing dollar assets, termed the “debasement trade,” because of the U.S.’s unsustainable fiscal trajectory, deficit spending, upended global trade, etc.¹

In the most extreme of cases, the narrative is that the dollar is doomed, which means investors need to look beyond dollar-denominated assets for secure investment opportunities.

Don’t “buy” it.

If the dollar were genuinely under siege and U.S. financial assets were being shunned, we would see telltale signs in various corners of the market. But we’re not.

Start with bonds. When investors fear a long-run loss of purchasing power, they usually demand higher yields to compensate. Instead, the opposite has unfolded: the 10-year Treasury yield is notably lower than where it began the year, and even the 30-year, typically most sensitive to long-term inflation worries, has drifted down as seen in the chart below. That isn’t the behavior of a market dumping Treasurys. On the contrary, it points to steady demand.

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10- and 30-Year U.S. Treasury Bond Yields

Another place to look is inflation expectations. The 10-year breakeven rate sits a bit above 2.2%, and 30-year expected inflation is near that level as well. In other words, expectations are pretty firmly anchored, with bond markets still expecting inflation to average close to the Fed’s target over the long haul. If investors truly believed a lasting bout of currency erosion was at hand, you would expect those measures to pop, dramatically. They haven’t.

10- and 30-Year Expected Inflation

The dollar tells a similar story. After a weak first quarter, the broad trade-weighted dollar index has been broadly stable for months and has even outperformed several major peers recently. If fears of dollar erosion were truly driving flows, you would likely see a cocktail of rising long-term nominal yields, widening corporate credit spreads, and a sliding greenback. We’re just not seeing that now.

To be sure, I’m not making an argument against gold or other inflation hedges here. A modest allocation can diversify portfolios and dampen volatility, particularly during bouts of geopolitical stress or when real yields fall. The keyword is “modest.” Going all-in on a single narrative leaves investors exposed to timing and headline risk. If markets have taught anything in the last few years, it’s that stories can travel faster than fundamentals, and then reverse just as quickly.

Long-time readers of my columns know what I see as the most effective inflation hedge over time: owning stocks. Buying shares of leading businesses offers a natural inflation valve, since companies can lift prices, improve efficiency, and compound earnings over time. Across most rolling 10-year periods, U.S. stocks have outpaced inflation—even through episodes of rising deficits, shifting policy regimes, and currency fluctuations. Over longer investment horizons, which most investors have, profits and dividends have been powerful antidotes to inflation and currency fluctuations. I don’t see that changing now.

Bottom Line for Investors

The so-called “debasement trade” may have a kernel of logic behind it, but not the kind of logic that justifies labeling the dollar as doomed. When you strip away the noise, what markets are signaling is stability, not debasement. Bonds are rallying, inflation expectations are anchored, and the dollar remains the world’s preferred reserve currency. I’m confident that will not change in our lifetime.

For investors, that means this is not the time to overhaul portfolios in favor of hard assets or chase a narrative about dollar decline. The playbook hasn’t changed: own the world’s most productive companies, stay diversified across asset classes, and let corporate earnings compound over time. A small allocation to gold or other real assets can provide ballast, but the real protection against inflation or dollar weakness is the same as it’s always been, in my view: Own stocks.

To help investors maintain that balance, I recommend all readers download our latest Stock Market Outlook⁵, which breaks down key market drivers to highlight where opportunities may be forming and where caution could be warranted as Q4 unfolds. Inside, you’ll find:

• Asset allocation guidelines for today’s market environment
• Expert forecasts for inflation, rates, and economic trends
• Industry tables and rankings to help you spot opportunities
• Buy-side and sell-side consensus insights at a glance
• And much more!

If you have $500,000 or more to invest, claim your complimentary copy of the report and discover how shifting market trends could shape new opportunities in the months ahead.

IT’S FREE. Download our latest Stock Market Outlook Report⁵

Disclosure