Reduce excess dollar exposure
Investors should consider diversifying excess US dollar exposure.
The US dollar's traditional role as a relative “safe haven” during periods of market uncertainty is under question. We believe that investors should review their currency allocations and consider diversifying US dollar holdings in excess of those required to meet liabilities or spending plans into currencies such as the euro and the Australian dollar. To diversify political risks, we like allocations to gold.
EUR
EUR
As the most liquid alternative to the US dollar, the euro is likely to benefit from unpredictable US policymaking. After its strong rally from 1.02 to 1.16, we may see a period of consolidation before further gains. With the Federal Reserve having more scope to lower rates than the European Central Bank, and a potential de-escalation in Middle East tensions—which would benefit Europe given its reliance on energy imports—the euro could find additional support. One key factor to monitor is the US economy; if data is stronger than expected, EURUSD could consolidate; if the US weakens, we may move more quickly toward our longer-term forecast of 1.20.
AUD
AUD
Softer macroeconomic data in Australia may prompt the Reserve Bank of Australia to cut rates further in the second half of 2025. However, we believe the Australian dollar (AUD) is likely to remain resilient. Continued government stimulus may result in stronger-than-expected economic data. If US-China trade tensions ease, we expect AUDUSD to potentially rise toward 0.70 in the first half of 2026.
EUR and AUD investment grade
EUR and AUD investment grade
Another avenue to reduce the USD exposure of portfolios is to switch USD bond holdings to those denominated in currencies we like. For euro-denominated bonds, we have constructed a portfolio of individual bonds from developed markets, primarily rated between A and BBB, with a target duration of approximately 3.5 to 5 years. These positions are actively monitored and are intended to be held to maturity, unless there is a significant adverse change in credit quality or market conditions.
We favor high grade and investment grade AUDdenominated bonds in the mid-duration segment, supported by Australia’s strong fiscal profile and AAA rating. Defensive sectors like telecom, utilities, consumer staples, and financials offer the best value, in our view. However, non-Australian investors should note these bonds are relatively illiquid and typically subject to withholding tax on interest income, which can reduce after-tax returns.