New South Wales Slashes U.S. Dollar Exposure by 61% Amid Weakening Currency Concerns

The New South Wales state government in Australia has made a significant move by reducing its exposure to the U.S. dollar from 75% to 14%. This strategic shift is part of a broader preparation for the anticipated further weakening of the U.S. dollar, influenced by various factors including policy uncertainties under the current administration, threats to the central bank's independence, and a slowing U.S. economy.

The state's financial institution, which focuses on investment management and debt issuance, has gradually transitioned towards defensive currencies such as the Japanese yen, Swiss franc, and euro over the past few years. Starting from 2024, the government has aggressively reduced its dollar exposure, bringing the weight of the U.S. dollar in its foreign exchange investment portfolio down to approximately 14% from nearly 75%. This strategic shift has already yielded significant returns, with the government anticipating a further 10% decline in the U.S. dollar.

The chief investment officer of the government department highlighted that the reduction in dollar exposure has enhanced the investment returns of the foreign exchange portfolio. The department currently expects the U.S. dollar to continue its downward trajectory. The strategy reflects a long-term view that the U.S. dollar is overvalued and that the current administration's policies, along with threats to the central bank's independence and global trade uncertainties, will continue to weigh on the currency.

The government's decision to keep 40% of its total investment portfolio unhedged aims to minimize portfolio volatility and redeploy risks to higher-yielding assets. This approach has added two percentage points to the department's investment returns over the past year, with unhedged positions outperforming hedged ones by approximately 7%. The department has ruled out any short-term active currency management, citing low predictability and unfavorable risk-return ratios.

The recent strategic shift has been influenced by the expectation of further rate cuts by the central bank and concerns over the independence of the central bank. The dollar index, which measures the strength of the U.S. dollar against a basket of major global currencies, showed a decline in August after reaching its best monthly performance in July. This reflects investor concerns over the continued erosion of the "American exceptionalism" narrative, potential threats to the central bank's independence, and a weakening U.S. economy.

Analysts predict that the U.S. dollar will continue its downward trend for the remainder of the year and into 2026, driven by a slowing U.S. economy and the central bank's potential rate cuts. The recent actions by the administration, including attempts to remove central bank Governor Lisa Cook, have further weakened the dollar's appeal as a safe-haven asset. The legal battle between the administration and the central bank could have long-term implications for the currency's stability.

The ongoing concerns over the central bank's independence have led to increased risk aversion and a flight to safe-haven assets like gold and silver. Gold has surged past 3500 dollars, reaching new all-time highs, while the U.S. dollar continues to weaken. The "New Bond King" Jeffrey Gundlach of DoubleLine Capital has predicted that the U.S. dollar will enter a long-term depreciation cycle, with emerging market stocks likely to outperform U.S. equities. This shift in sentiment underscores the growing uncertainty surrounding the U.S. dollar and its future trajectory.