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“We could've had it all,

Staying short the D-X-Y,

We had the yield inside our grasp,

But we gave it to the deal.”

Apologies to Adele.

A weaker dollar seems to be the answer to everyone’s prayers at the moment—or more specifically, investors want exposure to the exceptionalism of U.S. capital markets without the currency exposure that comes with it. From the BIS, via FXStreet:

"Many investors still want to remain invested in US equities (belief in US exceptionalism is alive and well!), but at the same time, they see growing risks for the US dollar, not least due to the US government’s attacks on the Federal Reserve. A significant depreciation of the dollar could reduce the returns on the actual equity investment or even wipe them out entirely. So what is the solution? Hedging against dollar weakness. Ultimately, these hedges are effectively bets on a weaker US currency and, if widely adopted, create selling pressure on the dollar."

I can think of two reasons why investors would want to stay invested in the idea of U.S. exceptionalism while hedging the currency.

The first is cyclical. The Fed is now joining—arguably prolonging—a global easing cycle that’s been underway for 18 months. This weakens the dollar from a strong starting point, adding to already loose global financial conditions through two channels: a direct channel, as U.S. interest rates and bond yields fall, and an indirect channel, as a weaker dollar allows foreign central banks to either ease further or sustain accommodative monetary policy for longer.

In short: a delayed easing cycle in the U.S. pushes the dollar lower while extending the rally in U.S. and global equities—a perfect setup for maintaining equity exposure while shorting the dollar.

The second reason is more structural, tied to the stated objectives of the U.S. administration, articulated in the so-called Mar-a-Lago Accord. This vision calls for a “weaker but still dominant” U.S. dollar, forcing the rest of the world to appreciate their currencies to help rebalance the global economy.

The goal is to boost U.S. industrial capacity and competitiveness, which has long borne the brunt of the perceived “exorbitant burden” that falls on the issuer of the dominant global reserve currency. In this scenario, the U.S. becomes more competitive and globally dominant—underpinning the U.S. exceptionalism trade in equities—even as its currency depreciates.

However, I can also see reasons why investors may be overfitting their narratives.

The cyclical argument, while sound, rests on a precarious foundation. The Fed—and central banks more broadly—have been easing policy in response to a fading inflation shock, not a downturn. In other words, we’ve largely achieved a soft landing, which implies inflation pressures could return more quickly and strongly than if the tightening cycle had pushed major economies into recession.

One line of argument suggests the Fed will run the economy hot, especially after Powell exits next year and is replaced by a dovish chair handpicked by Mr. Trump. That would be bearish for the dollar. But is it bullish for equities? Possibly. But I’d keep a close eye on the long bond in that scenario—and, by extension, all U.S. dollar-denominated assets.

What about the idea of a secular dollar bear market, driven by a U.S. 3D-chess strategy to weaken the dollar while maintaining the perks of reserve currency dominance? I understand what investors are trying to do: capture the upside of U.S. exceptionalism—a world-leading, ever-rising stock market—explicitly underwritten by the White House, while avoiding the downside risks posed by Trump and his team stumbling from one macroeconomic trade-off to another.

More specifically, they want the earnings and margins of the U.S. stock market without the implied sovereign risk attached to the dollar. But that’s not just a bet that equities can remain detached from U.S. political or economic decisions. It’s a bet that the market will continue to benefit from U.S. exceptionalism, while simultaneously hedging out the risks caused by the very same forces underwriting that exceptionalism.

This raises a fundamental issue: the more investors believe they need to hedge U.S. dollar downside risk in long U.S. equity portfolios, the more they are implicitly questioning the core thesis itself, especially in a market increasingly shaped by Oval Office decisions.

At the heart of this trade lies a deeper tension within Mr. Trump’s economic and foreign policy. Karthik Sankaran offers one of the best analyses of what the administration is trying to achieve by explaining how the U.S. is trying to monetize it hegemony across financial, economic, and military domains. 

The value and role of the dollar finely perched in this story, between continued and secular strength and oblivion. The attempt to extract greater global rents is dollar bullish in a world of free capital mobility—capital will naturally flow toward stronger, dominant markets, especially in a world increasingly dominated by a transactional geopolitics where the bigger nations impose their will on smaller countries.

But this directly conflicts with the desire to shrink the widening U.S. trade deficit, which Trump and his advisors interpret as evidence of foreign countries cheating or short-changing the U.S. One proposed solution, as suggested by Miran, is to impose capital controls, effectively taxing foreign holdings of U.S. assets. But that directly undermines the primacy the U.S. seeks to monetize in the first place.

A similar tension exists with the attempt to force global rebalancing. A generous interpretation of Trump’s policy might suggest he wants Europe to take more responsibility for its regional affairs and for the Chinese consumer to buy more U.S. goods. But this view frays quickly under the weight of the administration’s transactional and often adversarial behavior.

Does the U.S. truly want a Europe with an independent nuclear umbrella and the capacity to police its own sphere, without U.S. oversight or influence? Does it want the Chinese consumer, and by extension China's currency and capital markets, to rise in prominence? If so, why restrict China from purchasing advanced AI chips and other technologies? If the real concern is that China could become too powerful too quickly, doesn’t that undermine the entire notion that the U.S. wants China to rebalance? Is there middle ground of “managed rebalancing”, and even if there is, why would China accept being led down such a path?

These contradictions remain unresolved, either because Trump and his advisors are unaware of them, or because they understand them all too well but refuse to articulate which side of each trade-off they actually favor.

The outlook for the U.S. dollar—and its larger global role—is caught in this web of unresolved contradictions. Which brings us back to investors. Believing that a rolling put option on the dollar can protect long U.S. equity positions from policy missteps may not be a hedge as much as it is rolling into the deep end of the pool.

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