Equity markets welcomed Trump’s 90-day tariff truce by rebounding swiftly. However, we are maintaining a wait-and-see stance during this pause, while hedging against potential US dollar weakness by increasing our exposure to gold.
Key takeaways
- Our base case assumes the US avoids a recession. However, risks are on the rise.
- We are reverting to our baseline equity allocation, unwinding tactical protections.
- Gold remains our highest conviction, supported by macro uncertainty.
- The US dollar is poised for further weakness.
Macroeconomics in the crosshairs
Equity markets welcomed the 90-day tariff truce with a swift rebound as the peak trade war pain is behind us. However, this pause ushers in a phase of tactical patience – a time to weigh the macroeconomic consequences of trade decisions and gauge the market’s evolving response.
Trade tensions have already underpinned growth and reignited inflation expectations. After a sustained positive trend, household consumption is slowing, while sentiment is deteriorating. Meanwhile, corporates are grappling with a lack of visibility, dampening both investment and reshoring efforts.
As we adopt a wait-and-see stance during the 90-day pause, we are hedging against potential US dollar weakness by increasing our exposure to gold – a position backed by a strong conviction in the yellow metal.
“The 90-day pause ushers in a phase of tactical patience – a time to gauge the market‘s evolving response.”
US seeks another monetary reset
In a late-April speech, US Treasury Secretary Bessent announced that the US is seeking to ‘rebalance the international financial system’. Recall, the world has witnessed two such ‘resets’ since the 1945 Bretton Woods Agreement established the post-WWII monetary order.
The first came when then-US President Nixon was under pressure from large budget deficits, a current account that moved into deficit for the first time, and substantial capital outflows caused the level of gold backing the US dollar to fall to well below 50% of the American currency in circulation.
In response, Nixon unilaterally ended the convertibility of the US dollar into gold 1971. The US dollar weakened against currencies from capital surplus countries, nearly 30% against the German mark and Japanese yen by 1973 despite policy rates in both Germany and Japan falling to post-WWII lows. Gold surged 140% over the same period.
The second ‘reset’ of the 1945 arrangement came in the early-1980s as the US budget and current account deficits widened beyond previous historical extremes and, even though the direct link between the US dollar and gold had been broken, the value of American gold holdings once again fell below the key 50% threshold relative to currency in circulation.
In response, the United States pursued a negotiated ‘reset’ via the 1985 Plaza Accords. As in 1971, the German mark and the Japanese yen strengthened by more than 60% by 1987, while gold rose by nearly 50% with policy rates in Germany and Japan again falling to post-WWII lows.
With the US once again facing historically large budget and trade deficits and capital outflows, whether the US pursues a unilateral (1971) or a negotiated ‘reset’ (1985), investors should prepare for the prospect of further meaningful US dollar weakness against capital-surplus currencies like the euro, Swiss franc, Japanese yen, and Singapore dollar as the next stage of the reset unfolds.
Read our May House View for more insights.
