Federal Reserve May Devalue Dollar Amid Rate-Cutting Cycle, Strategist Warns

As global central banks enter a rate-cutting cycle, the chief investment strategist at a major U.S. bank has suggested that the Federal Reserve may resort to currency devaluation to address debt, making shorting the dollar a core investment theme. The strategist advises investors to increase their holdings of gold and cryptocurrencies to hedge against the long-term bearish risks of the dollar, and warns that overly optimistic market sentiment could trigger a "sell the fact" trade following the Jackson Hole symposium.

Amidst the intertwining pressures of U.S. debt and policy shifts, the market is undergoing a profound paradigm shift. The strategist recently noted that policymakers, in response to debt challenges, may opt for currency devaluation as a key path forward, with discussions around yield curve control (YCC) and other unconventional tools resurfacing. In this context, gold and cryptocurrencies, as assets that hedge against dollar devaluation and inflation risks, are becoming increasingly valuable.

With the global economy entering a new phase of monetary easing, expectations for the Federal Reserve to join the rate-cutting trend have reached a peak. Since 2025, 88 central banks worldwide have implemented rate cuts, marking the fastest easing pace since 2020. This expectation has driven asset prices, including stocks, credit, gold, and cryptocurrencies, to new highs, as investors brace for dovish remarks from the Federal Reserve chair at the Jackson Hole symposium.

The strategist's core argument is that "disruption equals devaluation." The increasing discussions around the Federal Reserve's independence, higher inflation targets, price controls in specific sectors, and gold revaluation all point to a common direction: policy disruptions aimed at lowering the dollar's value to facilitate easier financing of the U.S.'s massive debt and deficits.

For investors, this implies that the appeal of holding long-term government bonds is waning, while historically overvalued stock and credit markets face risks. The strategist recommends increasing allocations to gold and cryptocurrencies to seek shelter in the potential long-term bear market for the dollar in the coming years.

The strategist believes that the U.S. government's demand for economic prosperity and asset bubbles by 2025-2026 is seen as the most convenient way to reverse debt and deficit trends. This potential policy goal makes shorting the dollar a clear investment theme for 2026 and beyond, with the dollar index (DXY) expected to fall below 90.

This expectation explains why global investors continue to avoid long-term government bonds, instead flocking to overvalued stock and credit markets. The strategist points out that, apart from the AI boom, factors driving high valuations include currency devaluation (beneficial for nominal assets), demographic shifts (millennials and Gen Z prefer accumulating wealth through stocks), and the global consumption rebalancing from the U.S. to other regions.

Despite widespread market anticipation of dovish signals from the Federal Reserve chair at the Jackson Hole symposium, the strategist cautions investors that this could be a classic "buy the rumor, sell the fact" trading opportunity. The strategist believes that pre-conference market sentiment is extremely optimistic, and any dovish remarks may already be fully priced in, potentially leading to profit-taking.

The market's eagerness for Federal Reserve rate cuts is driven by the reality of U.S. fiscal pressures. Data shows that the average maturity of U.S. Treasury bonds is 5-6 years. To stabilize annual interest payments of 1.2 trillion, the 5-year U.S. Treasury yield needs to fall below 3.1%, providing a strong incentive for the Federal Reserve to adopt easing policies, potentially even implementing yield curve control, and reinforcing market expectations for rate cuts.

In the face of a long-term dollar devaluation trend, the strategist believes that gold, cryptocurrencies, commodities, and emerging markets will be the biggest winners as investors actively seek tools to hedge against inflation and dollar devaluation. A popular saying in the market aptly describes the current sentiment: "I just hope the market's gains exceed the currency's losses."

According to a global fund manager survey conducted in August, there is still significant room for investors to increase their relevant allocations. The survey found that only 9% of respondents have cryptocurrency exposure, with an average allocation of 0.3% of assets under management (AUM). In contrast, 48% of respondents hold gold, with an allocation of 2.2% of AUM.

In the energy market, the strategist offers a long-term view that diverges from mainstream opinions. The strategist believes that current oil and natural gas prices (which have fallen 41% since March) have already factored in expectations of a peaceful resolution to the Russia-Ukraine conflict. The strategist further analyzes that the geopolitical strategy of the Trump administration aimed to lower energy prices for U.S. consumers.

According to the strategist's view, if the U.S. and Russia cooperate to develop a cheaper and safer Northern Sea Route and jointly exploit the Arctic region, which holds 15% of the world's undiscovered oil reserves and 30% of natural gas, it would mean that the energy price bear market could deepen until 2026. While short-term expectations around related agreements may cause price rebounds, the long-term trend points to lower energy prices.