A Weaker Dollar vs. a Dollar Crisis: How to Think About Both

Concerns about the U.S. dollar usually fall into two categories. One reflects normal currency cycles. The other reflects fear of a true currency crisis. They are different concerns, but they can be understood—and addressed—within the same long-term framework.

If You’re Concerned About a Weaker Dollar
Periods of dollar weakness are common. Currencies move based on interest rates, capital flows, and relative economic growth, and the dollar has gone through many such cycles over time.

A globally diversified portfolio addresses this in two important ways.

• First, through ownership of non-U.S. companies.
  A diversified portfolio includes companies based outside the United States that earn revenues in foreign currencies. When the dollar weakens, those foreign earnings translate into more U.S. dollars, which can help offset the impact of a declining dollar.
• Second, through ownership of companies that do business abroad.
  Many U.S.-based companies generate a significant portion of their revenue overseas. A weaker dollar can make their goods and services more competitive in global markets, supporting revenues and profits even when the dollar is falling.

Dollar weakness is a risk that thoughtful diversification is specifically designed to handle.

If You’re Concerned About a Dollar Currency Crisis
A currency crisis is a different concern altogether. In his book Deep Risk, William Bernstein defines a deep risk (as opposed to temporary or “shallow” risk) as an event that permanently impairs purchasing power. One of the four deep risks he identifies is a currency crisis, often driven by severe or uncontrolled inflation.

To understand how different assets behave in those environments, Bernstein looked to examples in history—most notably Argentina and Weimar-era Germany. From those experiences, three lessons stand out.

• Lesson One: Currency crises are terrible for cash and bondsIn both cases, cash and domestic bonds suffered permanent losses of purchasing power because they were promises tied directly to a failing currency. Once inflation took hold, those losses were never recovered.
• Lesson Two: Stocks fell sharply—but recovered more quickly than most would expect.
  Equity markets in both countries declined dramatically in real terms as inflation accelerated. But unlike cash and bonds, stocks represented ownership of real businesses. In Weimar Germany, Bernstein shows that once investors shifted away from currency and toward productive assets, inflation-adjusted stock prices rebounded several-fold as prices reset to reflect the new monetary reality. The path was volatile, but the losses were temporary because businesses—factories, land, and productive activity—continued to exist even as the currency failed.
• Lesson Three: Global diversification reduced single-system risk.
  Investors who owned assets across countries and currencies were less dependent on any one monetary system continuing to function. Diversification did not eliminate volatility, but it reduced the risk that a currency crisis in one country became a permanent loss across an entire portfolio.

This leads to a counterintuitive conclusion: when it comes to currency and inflation risk, stocks have often been less risky than cash and bonds, even though they feel far more volatile along the way.

So What Are We Doing About This Risk?
The most important thing to understand is that this isn’t a new risk we’re suddenly responding to. The primary way we address currency and inflation risk is through decisions we made many years ago when these portfolios were designed.

From the start, they were built with meaningful international diversification specifically to manage risks that don’t show up neatly in forecasts—including currency risk and inflationary stress. That commitment hasn’t always been comfortable. Over the past decade, international stocks have significantly lagged U.S. stocks, and as U.S. markets have come to dominate global indexes, it would have been easy to let international exposure drift lower. We didn’t. Through disciplined rebalancing, we’ve often been adding to international holdings along the way, because our job is managing risk, not chasing recent performance.

That’s how this risk is addressed in practice: broad ownership of productive businesses across multiple countries and currencies, maintained consistently through full market cycles.

For investors who are deeply concerned about an extreme currency crisis, there are more aggressive steps one could take—borrowing in depreciating currency, buying physical assets, or owning property and businesses abroad. Those approaches can offer additional protection, but they are complex, costly, and come with their own risks.

A globally diversified equity portfolio won’t eliminate every possible outcome, and there are no guarantees. But it provides a significant amount of currency risk management in a simple, liquid, and cost-effective way. For most investors, it goes a long way toward addressing the risks that matter most—without requiring radical changes or permanent bets on worst-case scenarios.

Frequently Asked Questions