PIMCO Advises Underweighting U.S. Dollar Amid Shifting Global Currencies

On April 23, global fixed income giant PIMCO released a portfolio allocation recommendation report. The firm, which manages over 1.8 trillion dollars in assets, sharply pointed out that the current macroeconomic developments are self-inflicted for the United States. In a more multipolar world, investors may no longer need a single reserve currency.

The report, penned by the firm's chief investment officer for non-traditional strategies and the head of emerging market portfolio management, suggests that investors should underweight the U.S. dollar and seek opportunities in long-term bonds in Europe, emerging markets, Japan, and the United Kingdom.

The report argues that the U.S. dollar's status as the global reserve currency is not set in stone. As U.S. trade policies evolve, investors are reassessing their long-term assumptions about the U.S. investment environment. The simultaneous decline in the dollar, U.S. stocks, and U.S. bonds, a pattern more common in emerging market economies, reflects this shift.

PIMCO believes that the paradigm of investing in U.S. assets is changing. Historically, the U.S. has been a consumption-driven economy, importing more than it exports. This has led to a current account deficit, which has been financed by capital inflows from other countries investing in U.S. financial assets. However, with tariffs disrupting this balance, financing the U.S.'s twin deficits of the current account and fiscal balance may become more challenging without fiscal support. Investors may find it confusing to hold U.S. assets under these circumstances.

The report also highlights the challenges facing the Federal Reserve. With sovereign debt levels at historic highs and inflation exceeding the Fed's 2% target, the central bank will need to balance inflation expectations with the dimming prospects of U.S. growth. In contrast, other regions may see their currencies appreciate, easing inflation concerns and allowing central banks like the Bank of Japan and the European Central Bank to maintain a more dovish stance.

Investors are accustomed to government intervention during economic and market downturns. However, in this era of geopolitical tensions, global policy coordination may be less than in previous crises. This could lead investors to favor domestic assets, prioritizing capital returns over equity returns and diversifying their portfolios.

PIMCO advises investors that the current macroeconomic environment is self-inflicted for the United States. The dollar has only recently begun to structurally weaken, and the firm recommends the following allocations: underweight the U.S. dollar, as the U.S. has the largest negative international investment position, financed by global capital. As this balance adjusts, the dollar may weaken. High allocation to global duration in Europe, emerging markets, Japan, and the United Kingdom, as duration—a measure of interest rate sensitivity, typically higher for long-term bonds—is less predictable in the U.S. but offers attractive alternatives. Preference for trades that benefit from a steepening yield curve, as the shift from global efficiency to nationalism introduces greater fiscal risk premiums. Underweight consumption, as the difference between investment-grade and high-yield credit may widen, with investment-grade assets having more flexible balance sheets and continued support from insurance companies, a trend less likely to continue for high-yield credit.

In a more multipolar world, a single reserve currency may no longer be necessary. Multiple options will be essential for safeguarding national security interests, ensuring diversification, and providing stable returns.