Still, President Donald Trump’s chaotic tariff rollout may have ushered in a new era for the dollar. Earlier this month, it was down 10% year to date against the basket of currencies in the famous DXY index. That’s the steepest loss for the greenback in the first half of the year, per Reuters, since 1986, shortly after the U.S. and several allies had reached an agreement, known as the Plaza Accord, to devalue a wildly overpriced dollar.
“In the scheme of things, there’s ample room for the dollar to decline further,” said Sterling, formerly the chief international economist at Merrill Lynch.
“At a time when we have a deficit-to-GDP ratio of 7% and need foreign capital to help fund that deficit,” Sterling said, “to be actively considering measures to discourage capital inflows is almost a recipe for a weak dollar.”
In his view, rapid policy shifts in Washington have prompted a long-awaited correction to an overvalued dollar. He and many others point to purchasing power parity, a framework that assumes exchange rates, in the long run, should allow a given amount of money to purchase the same amount of goods and services in any country.
“And once a trend gets established,” Sterling said of currency markets, “it can sometimes feed on itself.”
If the dollar’s decline persists, it will have major implications for economies around the world—and Americans’ stock portfolios.
Those trends could reverse, however, if dollar weakness pushes investors to allocate more money elsewhere. When Americans purchase foreign stocks and see the greenback decline, Sterling noted, their returns can get a significant boost.
“That was considered kind of a hammer blow to its export industries,” he said. “But the Japanese stock market was one of the strongest markets in the world in the entire second half of the [1980s] because they brought interest rates down very aggressively.”
That type of deal might be unrealistic, but currency markets look like they are doing the work themselves. In the meantime, many foreign stock markets are more than weathering tariff uncertainty.
Hong Kong’s Hang Seng Index, for example, is up over 20% this year, compared to the nearly 3% gain for the S&P 500 year-to-date as of Monday’s close. The S&P Latin America 40, meanwhile, has quietly surged by 20%.
Sterling acknowledges a massive caveat to his argument about a weakening dollar, however. There’s plenty of optimism—perhaps well placed, he added—about the AI trade, which many believe is still in its early stages. It would be shocking if American leadership in that space disappears anytime soon, regardless of what happens with U.S. trade and economic policy.
That means investors will need plenty of dollars, preventing the greenback from falling precipitously.
“Maybe U.S. exceptionalism is still the main story in the global economy for the next five years,” he said, “even though the tariffs and all the related sort of policy measures that have diminished U.S. standing have taken us from being hyper exceptional to merely exceptional.”
But tech leadership hasn’t always guaranteed superior equity returns, especially when the dollar is relatively weak. From February 2002 to July 2011, the MSCI EAFE index, covering large and mid-cap companies in developed markets outside North America, nearly doubled in value, Sterling noted. The S&P trailed significantly, gaining just over 40% in that span.
