'Make sure you've got the right exposures in place to potentially participate in potential upside of ex-US stock markets,' cautions CIO at WTW
Seven months into 2025, the US dollar recorded its steepest six-month slide in over three decades, reflecting deepening investor concerns about the US fiscal trajectory and increasingly unpredictable trade policy.
This erosion of confidence has reignited debate among institutional investors over how far the dollar could fall, especially with no resolution in sight to the ongoing trade tensions or persistent deficit issues.
John Delaney believes the weakening US dollar carries meaningful implications for institutional portfolios, particularly in how they allocate between domestic and international equities.
As other major currencies gain ground, “all things equal, a depreciating US dollar would lead to some potential outperformance of ex-US equities versus US stocks,” noted Delaney, CIO at WTW Investments.
He sees this not just as a market signal, but as a prompt for pension plans and other long-term investors to reassess and review their equity positioning.
“Let's call it a call to action for institutional investors to make sure they're reviewing their overall equity portfolios, to make sure that they have the right exposures that they want, both US and ex-US, to make sure they’re in a position to benefit from,” he said. “It’s not ‘Get rid of all your US stocks’. It’s more make sure that you’ve got the right exposures in place to potentially participate in potential upside of ex-US stock markets.”
Meanwhile, Steven Locke views recent dollar depreciation down nearly 9 per cent on a trade-weighted basis year-to-date and nearly 5 per cent against the Canadian dollar as a meaningful move, though not unprecedented. Rather than overreact, Locke said his team is assessing the situation through both short- and long-term lenses.
In the near term, tactical models are being adjusted to account for shifting market sentiment. But the broader concern lies in whether the current weakness is signaling something more structural.
“We need to think about whether or not the regime change has been significant and ongoing that would cause us to think strategically how we think about the use of the dollar within a broad portfolio,” said Locke, CIO at Mackenzie Investments.
“But we also think about some of the structural flows around the marketplace that we've really seen coming through the last 5-20 years. Many institutional investors have been expanding their non-Canadian dollar portion of their portfolio. They’ve been thinking about exposures to other markets by geography, but also other asset classes and diversity they can get through global real estate or private credit, private equity, other alternative strategies or private markets that they might be exposed to, which includes exposure to the US dollar in the way they bring that into the portfolio,” he added.
While Locke emphasized that Canadian pension plans have long diversified into US and global assets, creating embedded currency exposure, the question now is whether that exposure still serves its purpose.
“The question we have to ask ourselves in the medium term is, is some of that now changing? Are we going to see some degree of pause in direction or even perhaps a reversal of direction?” he said. “It's too early to tell.”
Pension plans who value liabilities on a mark to market basis need to consider how a weakening US dollar interacts with evolving rate expectations, noted Delaney. He said that while markets have anticipated ongoing rate cuts over the past 18 months, the Federal Reserve has shown limited appetite for significant easing, particularly against a backdrop of tariff uncertainty and fiscal strain.
As a result, foreign investors might expect or want higher compensation in terms of overall yields on US Treasuries driven by concerns about fiscal sustainability and currency depreciation, he explained. Notably, for pension funds, that dynamic presents more of an opportunity than a threat, particularly on the fixed income side.
“This is an opportune time to capitalize on yields being higher,” he said, advising that rather than trying to time interest rate moves or relying heavily on duration for returns, pension funds should focus on starting yields, especially within higher-carry fixed income segments.
“Starting yields are a decent indicator of how your fixed income assets are going to perform going forward,” he said.
Meanwhile, Locke noted the question around how much of the dollar exposure to keep in portfolios is where most questions are being asked now, acknowledging that Mackenzie has already trimmed its US dollar overweight position in favor of the yen and euro, shifting from neutral to underweight US currency.
Christine Tan, portfolio manager at Sun Life Global Investments, sees the same question coming up with her clients. Tan emphasized for a pension plan, “a US dollar weakness or strength matters because it directly impacts your performance. Last year, US dollar was a significant contributor to performance. Year to date, it’s been a drag.”
The conversation around hedging is shifting, too, particularly as Locke sees growing momentum for rethinking passive currency risk.
“The lack of questioning whether to hedge US currency exposure, I think that’s changing,” he said, while Tan noted why many portfolios still don’t hedge equity currency risk.
“The companies themselves have embedded currency hedges. For you to hedge your direct exposure might actually be hedging too much,” she said, noting her team’s tilt toward diversification, particularly to gold.
“We have a strategic overweight to gold,” she said. “We've held that since Q4 last year, and that was a combination of fundamentals as well as technicals. Flows have been very consistent and strong into gold. The World Gold Council actually tracks some central bank buying and it's been very steady for going on two years now.”
But Locke doesn’t see the current environment requiring major reallocation, at least not for well-diversified plans aligned with their long-term liabilities. Despite heightened policy uncertainty, he sees potential upside in parts of the US market.
“There’s a potential to see asset prices rising, notwithstanding some of the policy change and volatility we are assessing,” he noted, referring to recent fiscal legislation.
He urged institutional investors to stay focused on delivering against their mandates while remaining flexible enough to accommodate shifts in policy or public sentiment.
“Are we delivering on our mandate relative to the investment policy that we've created and the liabilities that we are supporting? Those are things that a plan should be thinking about today,” he said.
