The Dollar's Decline and Its Implications for Private Market Allocation

The U.S. dollar, once the unassailable anchor of global finance, is showing signs of strain. After years of dominance fueled by robust U.S. economic growth and divergent global monetary policies, the greenback now faces a crossroads. While it remains the world's reserve currency, structural weaknesses—ranging from a widening current account deficit to geopolitical tensions—are pushing investors to rethink their allocations. This shift is particularly consequential for retirement portfolios, where private equity and alternative assets are increasingly shaping risk/return dynamics.

The dollar's overvaluation is no longer a secret. The DXY Index, which measures the dollar's strength against a basket of major currencies, has traded at levels two standard deviations above its 50-year average. Yet, as J.P. Morgan analysts note, this overvaluation is unsustainable. A correction of 10%–20% against the euro and yen is not just possible—it's probable. What does this mean for investors? It means capital is on the move, and retirement portfolios must adapt.

The Dollar's Weakness and Global Capital Flows

A weaker dollar has historically boosted the appeal of non-U.S. assets. When the greenback dips, foreign equities and commodities gain a price advantage for U.S. investors. This is already playing out in 2025: European stocks have seen a surge in inflows, while U.S. equity funds face outflows for the first time in years. For 401(k) participants, this signals a need to diversify beyond the S&P 500.

But the implications go deeper. A weaker dollar amplifies the allure of private equity and alternative assets, which often sit outside the volatile public markets. Private equity, for instance, has delivered median annualized returns of 13.5% over a decade, outpacing public equities and fixed income. As global capital flows shift toward these assets, their risk profiles are evolving.

The recent judicial validation of private equity in retirement plans—highlighted in the Anderson v. Intel case—has removed a major barrier. Courts now recognize that private equity isn't inherently imprudent if properly diversified and disclosed. This has emboldened plan sponsors to allocate a portion of 401(k) assets to private markets, with some target-date funds now allocating up to 20% to private equity.

Yet, this isn't without risk. Private equity is illiquid, and its performance is sensitive to macroeconomic shifts. A weaker dollar, while beneficial for global diversification, also raises the cost of debt in international markets. For example, U.S. private equity firms investing in Europe or Asia face higher borrowing costs when converting dollars to local currencies. This could erode returns in deals reliant on leverage—a core component of many private equity strategies.

The Role of Alternative Assets in a Dollar-Weak World

As the dollar weakens, alternatives like gold, real estate, and commodities are gaining traction. Gold, in particular, has seen a strategic overweight in institutional portfolios, with central banks adding 400 tons in 2024 alone. For 401(k) savers, this underscores the importance of hedging against currency devaluation.

Real estate and infrastructure investments also offer dual benefits: steady income and inflation protection. In a world where the dollar's purchasing power is eroding, tangible assets that generate cash flow become increasingly attractive. For example, a 401(k) allocating a portion to real estate investment trusts (REITs) or private infrastructure funds could offset currency-related losses.

However, the rise of private credit—a subset of alternative assets—introduces new complexities. While it offers higher yields than traditional fixed income, its focus on non-investment-grade borrowers increases default risk. Fiduciaries must tread carefully, ensuring these investments align with the risk tolerance of retirement savers.

Strategic Recommendations for 401(k) Participants

1. Diversify Beyond the Dollar: Allocate a portion of your portfolio to non-U.S. equities and commodities. A 10%–15% exposure to international stocks and gold can hedge against dollar depreciation.
2. Embrace Private Markets with Caution: If your 401(k) offers private equity or real estate options, consider small allocations (5%–10%). These assets offer diversification but require patience and a long-term horizon.
3. Hedge Currency Risk: For those with significant U.S. dollar exposure, consider ETFs or funds that hedge against currency swings. This is especially relevant for investors with global exposure to equities and commodities.
4. Monitor Regulatory Shifts: Stay informed about executive actions and legislative changes that could expand access to private investments. The upcoming executive order on retirement plan allocations could unlock new opportunities.

The dollar's decline isn't a collapse—it's a reset. For retirement portfolios, this means rebalancing toward assets that thrive in a multipolar world. Private equity, real estate, and commodities are no longer niche; they're essential tools for navigating a dollar-weak environment. As global capital flows shift, the savers who adapt early will find themselves best positioned for the years ahead.