US Stocks At Risk Due To Rising De-Dollarization Trend, Warns Morgan Stanley Wealth CIO

The stability and dominance of the US dollar, a cornerstone of the global economy, may be facing significant challenges, according to Morgan Stanley Wealth Management’s Chief Investment Officer Lisa Shalett. These emerging threats could have profound implications for the U.S. stock market.

What Happened: Shalett has raised concerns about the U.S. dollar’s supremacy being at risk, which could negatively impact U.S. equities. Shalett’s insights were shared in a recent note, Business Insider reported on Wednesday.

Shalett calls for investors to “consider preparing for a US dollar regime shift,” citing the recent gold and Bitcoin rallies, Japan’s policy changes, and U.S.-China tensions as pivotal factors that could undermine the dollar, affecting stock valuations.

The ongoing stock rally owes much to high liquidity from policymakers, with the dollar’s strength being a key factor in mitigating import inflation and energy costs, and bolstering debt financing. Shalett, however, warns that this trend might be on the verge of reversing.

Since last October, gold has climbed 18%, while Bitcoin has surged over 50% this year, setting new highs above $73,000 in March. These increases may signal mounting concerns regarding persistent inflation, as evidenced by the escalating prices of global cyclical commodities such as oil and copper.

Additionally, Japan’s stock market is on the rise, and with the Bank of Japan abandoning yield curve control, the yen’s fortification against the dollar is likely. This, along with potential repatriation flows, could trigger a sell-off in U.S. stocks.

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Heightening tensions with China over various issues, including technology and social media, may hasten the departure from the dollar. Shalett notes that the forthcoming U.S. presidential campaigns, which are expected to take hardline positions on China, could exert continuous pressure on the dollar, inflation, and interest rates.

A depreciation in the dollar’s value could influence U.S. stocks by altering earnings multiples, which have significantly contributed to the market’s recent success, Shalett concludes.

Why It Matters: Earlier this year, Morgan Stanley issued a cautionary note about the potential waning of the U.S. dollar’s global dominance, attributing this to the growing influence of digital assets like Bitcoin and various central bank digital currencies (CBDCs). Andrew Peel, the head of digital assets at Morgan Stanley, pointed out a significant shift in the perception and use of digital assets globally, which could challenge the dollar’s current position, which accounts for about 60% of global foreign exchange reserves.

Contrastingly, Steve Eisman, the investor famous for "The Big Short," has dismissed concerns over the dollar losing its reserve currency status. In a CNBC interview, Eisman refuted the idea that the growing U.S. sovereign debt poses a threat to the dollar’s position. He criticized the long-standing argument, suggesting that those who have been predicting this scenario for decades should exhibit humility. This debate comes amid discussions of a potential “BRICS currency” and moves by countries like Russia and Iran to conduct trade outside the SWIFT payment system, which some view as initial steps toward replacing the dollar.

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