Make the dollar weak again!
Read the market analysis and fund positioning
The dollar is our currency, but it’s your problem. With these legendary words in 1971, John Connally, US Secretary of the Treasury under President Nixon, summed up what is still true today: the world dances to the tune of the greenback. Reason enough to take a closer look at the US dollar, its importance, its drivers and the implications for investors.
King Dollar: Why the world depends on the greenback
The US dollar is the world's most important transaction, investment and reserve currency - a kind of lubricant for the global economy. As such, the greenback dominates the international financial market. In the first quarter of 2024, central banks worldwide held around 59 per cent of their currency reserves in dollars. To illustrate the importance, almost half of all transfers (about 47%) and almost all foreign exchange transactions (88%) are in dollars. The dominance of the dollar is particularly evident in the oil business: some 80-85% of all oil purchases worldwide are paid for in US dollars. The dollar is to the financial world what English is to the financial world - a language that is understood and accepted everywhere.
This dominance is a thorn in the side of other economic blocs, that want to dethrone the dollar. The BRICS countries (Brazil, Russia, India, China and South Africa) dream of a world without dollar dominance. Their goal: to break dependence on the dollar. But so far, all attempts at ‘Dedollarisation’ have failed. The US currency remains unchallenged. Old habits die hard. So the greenback will remain firmly in the saddle of the global economy for the foreseeable future.
What drives the US dollar?
Three factors drive the exchange rate: interest rates, economic growth and trustworthiness.
These are usually multi-dimensional, but one often dominates. In addition to the interest rate differential (often a function of inflation), the growth differential and the safe-haven status of the currency are also included. At least in theory, the adjustment of exchange rates should mean that goods and services in a basket of commodities can be bought at the same price in two different currencies (purchasing power parity).
So, if higher inflation in the US leads to higher interest rates than in the eurozone, people will invest their money in US dollars. The result: the dollar rises! The interest rate differential is analogous to the growth differential: is the US economy booming more than others? The dollar rises! Equally important is the safe-haven function: is there a crisis in the world? Investors flee to the dollar! In times of crisis, investors seek protection and safety for their money. They invest in currencies that are perceived to be particularly crisis-resistant due to political and institutional stability or confidence in the central bank. In the recent past, the euro crisis of 2012/2013 is a good example of the US dollar as a safe-haven. At the time, investors were literally driven by fear.
‘Dollar smile’: Strong US dollar due to fear and greed
The following chart provides a simplified illustration of the impact of the growth differential and the perception of the US dollar as a safe-haven currency on the strength of the greenback: the 'dollar smile' chart shows economic expectations on the X-axis and the strength of the US dollar on the Y-axis. At first glance, it is clear that the US dollar tends to strengthen when the environment is very bad ('fear') and when the environment is very good ('greed'). Unless the US has a significant growth advantage, the US dollar tends to weaken.
The US dollar in descent
So where are we today? Growth in Europe is below average but catching up. By contrast, the US economy is cooling down. The growth differential is therefore narrowing, and the interest rate differential is also moving against the US dollar. The fact that the Europeans are currently showing unity, including on military and fiscal policy, is weakening the safe-haven argument for the US dollar. These facts, combined with the moderate global growth we expect, create a "dollar smile" chart that does not justify a strong dollar. In addition, the new US administration appears to be deliberately working to weaken its own currency.
Donald Trump's dollar mission: Mar-a-Lago instead of Plaza
“Make the dollar weak again” - this could be the motto of Donald Trump's currency policy. The plan already has a name: the "Mar-a-Lago Accord", named after Trump's Florida estate. The historical model: Ronald Reagan successfully devalued the overvalued dollar exactly 40 years ago with the so called "Plaza Accord". The parallels are unmistakable - Trump wants to follow in the footsteps of his Republican predecessor. It is unclear whether the leading industrial nations will actually work together in this way. But the new US president is seeking to weaken his currency, not least in order to make his own products more competitive abroad.
Our conclusion is clear: we have fully hedged our dollar positions and expect a period of dollar weakness. This is very much to President Trump's taste, for whom a weak dollar is a beautiful dollar!
Please contact us at any time if you have questions or suggestions.
ETHENEA Independent Investors S.A.
16, rue Gabriel Lippmann · 5365 Munsbach
Phone +352 276 921-0 · Fax +352 276 921-1099
info@ethenea.com · ethenea.com
This is a marketing communication. It is for information purposes only and provides the addressee with guidance on our products, concepts and ideas. This does not form the basis for any purchase, sale, hedging, transfer or mortgaging of assets. None of the information contained herein constitutes an offer to buy or sell any financial instrument nor is it based on a consideration of the personal circumstances of the addressee. It is also not the result of an objective or independent analysis. ETHENEA makes no express or implied warranty or representation as to the accuracy, completeness, suitability, or marketability of any information provided to the addressee in webinars, podcasts or newsletters. The addressee acknowledges that our products and concepts may be intended for different categories of investors. The criteria are based exclusively on the currently valid sales prospectus. This marketing communication is not intended for a specific group of addressees. Each addressee must therefore inform themselves individually and under their own responsibility about the relevant provisions of the currently valid sales documents, on the basis of which the purchase of shares is exclusively based. Neither the content provided nor our marketing communications constitute binding promises or guarantees of future results. No advisory relationship is established either by reading or listening to the content. All contents are for information purposes only and cannot replace professional and individual investment advice. The addressee has requested the newsletter, has registered for a webinar or podcast, or uses other digital marketing media on their own initiative and at their own risk. The addressee and participant accept that digital marketing formats are technically produced and made available to the participant by an external information provider that has no relationship with ETHENEA. Access to and participation in digital marketing formats takes place via internet-based infrastructures. ETHENEA accepts no liability for any interruptions, cancellations, disruptions, suspensions, non-fulfilment, or delays related to the provision of the digital marketing formats. The participant acknowledges and accepts that when participating in digital marketing formats, personal data can be viewed, recorded, and transmitted by the information provider. ETHENEA is not liable for any breaches of data protection obligations by the information provider. Digital marketing formats may only be accessed and visited in countries in which their distribution and access is permitted by law. For detailed information on the opportunities and risks associated with our products, please refer to the current sales prospectus. The statutory sales documents (sales prospectus, key information documents (PRIIPs-KIDs), semi-annual and annual reports), which provide detailed information on the purchase of units and the associated risks, form the sole authoritative and binding basis for the purchase of units. The aforementioned sales documents in German (as well as in unofficial translations in other languages) can be found at www.ethenea.com and are available free of charge from the investment company ETHENEA Independent Investors S.A. and the custodian bank, as well as from the respective national paying or information agents and from the representative in Switzerland. The paying or information agents for the funds Ethna-AKTIV, Ethna-DEFENSIV and Ethna-DYNAMISCH are the following: Austria, Belgium, Germany, Liechtenstein, Luxembourg: DZ PRIVATBANK S.A., 4, rue Thomas Edison, L-1445 Strassen, Luxembourg; France: CACEIS Bank France, 1-3 place Valhubert, F-75013 Paris; Italy: State Street Bank International – Succursale Italia, Via Ferrante Aporti, 10, IT-20125 Milano; Société Génerale Securities Services, Via Benigno Crespi, 19/A - MAC 2, IT-20123 Milano; Banca Sella Holding S.p.A., Piazza Gaudenzio Sella 1, IT-13900 Biella; Allfunds Bank S.A.U – Succursale di Milano, Via Bocchetto 6, IT-20123 Milano; Spain: ALLFUNDS BANK, S.A., C/ Estafeta, 6 (la Moraleja), Edificio 3 – Complejo Plaza de la Fuente, ES-28109 Alcobendas (Madrid); Switzerland: Representative: IPConcept (Schweiz) AG, Münsterhof 12, Postfach, CH-8022 Zürich; Paying Agent: DZ PRIVATBANK (Schweiz) AG, Münsterhof 12, CH-8022 Zürich. The paying or information agents for HESPER FUND, SICAV - Global Solutions are the following: Austria, Belgium, France, Germany, Luxembourg: DZ PRIVATBANK S.A., 4, rue Thomas Edison, L-1445 Strassen, Luxembourg; Italy: Allfunds Bank S.A.U – Succursale di Milano, Via Bocchetto 6, IT-20123 Milano; Switzerland: Representative: IPConcept (Schweiz) AG, Münsterhof 12, Postfach, CH-8022 Zürich; Paying Agent: DZ PRIVATBANK (Schweiz) AG, Münsterhof 12, CH-8022 Zürich. The investment company may terminate existing distribution agreements with third parties or withdraw distribution licences for strategic or statutory reasons, subject to compliance with any deadlines. Investors can obtain information about their rights from the website www.ethenea.com and from the sales prospectus. The information is available in both German and English, as well as in other languages in individual cases. Explicit reference is made to the detailed risk descriptions in the sales prospectus. This publication is subject to copyright, trademark and intellectual property rights. Any reproduction, distribution, provision for downloading or online accessibility, inclusion in other websites, or publication in whole or in part, in modified or unmodified form, is only permitted with the prior written consent of ETHENEA. Copyright © 2025 ETHENEA Independent Investors S.A. All rights reserved. 02/04/2025