Dollar weakness remains even amid trade deals

The trade deals keep coming, yet the dollar continues to weaken, down over 10% this year after the biggest first-half loss since 1973.Why it matters: The greenback slump could be a sign that countries are now embracing de-dollarization: moving away from dollar-denominated assets as uncertainty about fiscal policy in the U.S. remains a headwind.Mass de-dollarization is not just bad for the dollar. It can weigh on stocks.What they're saying: "I check the dollar every morning the first thing when I wake up," Mohamed El-Erian, the former PIMCO CEO and current president of Queen's College, Cambridge, told Axios."Policy-induced uncertainty" is driving de-dollarization, he said.Many investors think this is a reset we will emerge from with a more efficient system, but El-Erian cautions that instead it could result in "a Jimmy Carter moment where we end up in stagflation."Be smart: As uncertainty drives dollar declines, that also impacts other parts of the market and the economy.Dollar weakness could steepen the yield curve, which would lead to higher borrowing costs for corporates and households.If global investors truly move away from not only the dollar, but also dollar-denominated assets like stocks, that may be a headwind for the broader market as well.Yes, but: There "is no real alternative" to the dollar, so investors can only reduce their overweights to the greenback "very gradually," El-Erian said.Zoom out: The recent dollar declines come after a three-year bull run, according to a research note from Vanguard, which also argues:Recent weakness leaves the greenback at "fair value."Upside could come from trade deals and policy in the near term.Productivity and higher rates support dollar valuations in the long term.The bottom line: Dollar declines may not be permanent, but the weakness is a reminder of the importance of global diversification, Vanguard wrote.As valuations are stretched for U.S. equities and international markets continue to offer outsized returns, "spreading risk across regions" is key for long-term investing.

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