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Since the end of the Bretton Woods monetary arrangement in 1971 and the start of floating exchange rates, we have experienced five decades of successive US dollar secular bear and bull cycles. Since then, understanding the implications of the US dollar regime has actually been the most important input for asset allocation. During secular US dollar bull markets, US assets outperformed the markets in the rest of the world (1994–2001), while during secular bear trends (2002–2010), the assets from the rest of the world outperformed US assets. Since 2011, we have experienced a US dollar secular bull market again.

This sequence has been driven by the unique status enjoyed by the greenback as the world’s main reserve currency. Most of the global trade in goods and services has been conducted in US dollars, albeit to a declining extent. Today, the rise of China is changing this dynamic in multiple ways. Furthermore, the US is inexorably moving towards MMT-inspired macroeconomic policies, where recurring public deficits are monetised by the central bank to a very significant extent. Nowadays, however, all major advanced economies are doing  exactly the same thing to varying degrees. Accordingly, the US dollar is not debased against other paper currencies but against real assets, equities, and gold, in that order. Meanwhile, we are entering the era of a bipolar world with two uncorrelated economic and financial cycles, one American and one Chinese. In this context, owning both US and Chinese assets revives the benefits of international diversification, which had been significantly undermined by globalisation

This is an extract of the ’CIO Monthly’. If you want to learn more about our investment approach, get in touch with us.