BCA Research is urging investors to pare back dollar holdings against a select group of currencies, saying the U.S. unit should weaken as American real interest rates trend lower and foreign purchases of U.S. assets wane.
The firm specifically recommends selling the U.S. dollar against the South Korean won, Japanese yen, Taiwan dollar, Singapore dollar and the euro. BCA also carries long positions in the won, yen and Taiwan dollar versus the greenback, and it uses the Hungarian forint as a proxy for the euro in its positioning.
Underpinning the recommended longs is the presence of current-account surpluses for those currencies, which BCA expects to provide a stabilising influence as international investors reduce exposure to U.S. securities.
BCA anticipates appreciation in the Chinese yuan against the dollar, but it also expects Chinese authorities to constrain those gains through intervention. That dynamic would leave the yuan relatively weaker when compared with the surplus-backed currencies the firm prefers.
The research house also flagged several emerging-market currencies it views as likely underperformers. BCA expects the Brazilian real, Indonesian rupiah and Philippine peso to lag, making them less compelling alternatives to the dollar for investors.
Central to BCA’s bearish dollar outlook is its forecast for lower U.S. "core real yields" - a measure the firm defines as the inflation-protected Treasury yield after excluding the bond term premium. BCA argues that recent increases in U.S. yields have been driven more by rising fiscal and inflation-related term premiums than by stronger growth expectations.
Those higher term premiums tend to exert downward pressure on the dollar, the firm says, whereas increases in core real yields are typically supportive of the currency.
Foreign purchases of U.S. equities - in part fuelled by enthusiasm over artificial intelligence - have helped finance America’s wide current-account deficit and provided support to the greenback. BCA expects those inflows to slow if pricey U.S. technology shares lose momentum.
In portfolio terms, BCA expects the dollar to become more sensitive to global growth and to move lower alongside U.S. equities. The euro, in turn, may act more defensively as European investors pare back the portion of their current-account surplus recycled into American securities.
On asset allocation, the firm recommends underweighting U.S. equities, maintaining a neutral stance on emerging-market stocks, taking a modest overweight position in Europe and a substantial overweight in Japan. A softer dollar, BCA adds, should be supportive for gold and gold-mining stocks, and the research house prefers non-U.S. government bonds following any near-term selloff.