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Capital IdeasTM

Investment insights from Capital Group

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Bonds
Will the us dollar continue to weaken?
Andrew A. Cormack
Fixed Income Portfolio Manager
Philip Chitty
Portfolio Manager
Tom Reithinger
Fixed Income Portfolio Manager
Harry Phinney
Fixed Income Investment Director
April 14, 2023

A sharp decline late last year has left many wondering if the US dollar’s decade-long bull run is coming to an end.


The US dollar is significantly above the long-term average

Sources: Capital Group, JP Morgan. Data as of 31 March 2023. The real broad effective exchange rate measures the value of the US dollar against a group of developed and emerging market currencies and adjusts for inflation using the Consumer Price Index (CPI). CPI is a commonly used measure of inflation that measures the average change over time in the prices paid by consumers for a basket of goods and services.

A continuing downward trend would be welcome news for investors in non-US bonds and equities, where total returns have been eroded by currency translation effects. And, in many ways, a correction is overdue. From its trough in 2011 to the recent peak in late 2022, the US dollar rose 45% against JP Morgan's inflation-adjusted broad-based basket of developed and emerging market currencies. This has left it overvalued against most major and emerging markets (EM) currencies on a purchasing power parity (PPP) basis.


But these metrics suggest the dollar has been overvalued for quite some time, and valuation alone has not been enough to bring it back down. For a longer-term decline to set in, there must be one or more catalysts. In this piece, we outline a few we are watching that could influence the direction of the dollar.


Andrew Cormack is a fixed income portfolio manager at Capital Group. He has 19 years of investment industry experience and has been with Capital Group for five years. Prior to joining Capital, Andrew worked as a portfolio manager at Western Asset Management. He holds a first-class honours degree in actuarial science from the London School of Economics and Political Science. He also holds the Investment Management Certificate. Andrew is based in London.

Philip Chitty is a fixed income portfolio manager with 29 years of experience. He holds a master’s degree in economics from Birkbeck College, University of London.

Thomas Reithinger is a fixed income portfolio manager with 12 years of experience. He holds an MBA from Harvard Business School and double bachelor’s degrees in business & management and computer engineering from Rensselaer Polytechnic Institute.

Harry Phinney is a fixed income investment director with 17 years of industry experience. He holds an MBA in international business from Northeastern University, a master's degree in applied statistics and financial mathematics from Columbia University and a bachelor's degree in international political economy from Northeastern University.

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