Investors should prepare for a prolonged dollar sell-off, which may resemble the period after the dot-com boom and bust in the 2000s, analysts at RBC Capital Markets warn. The tailwinds that have supported the U.S. currency may soon turn against the dollar. The investment bank has developed several strategies to preserve capital, including buying call options on EUR/USD and put options on USD/JPY.

What threatens the U.S. dollar

Although the dollar has already weakened this year amid uncertainty surrounding President Donald Trump's policies, it has been supported by a rising stock market and large capital flows from overseas, including from giant passive investment funds, said RBC currency strategist Richard Kochinos. His note quotes Bloomberg. As the analyst explained, in the last two decades, such global investors preferred expensive U.S. assets - primarily stocks - which contributed to the strengthening of the dollar.

"This concentration has yielded good results over the past 15 years, but in the current environment it has become a source of risk," Kochinos wrote. - Any noticeable change in demand and relative yields could have serious consequences for the currency market."

He noted that capital tends to reallocate after shocks, as happened after the dot-com bubble deflated in 2000. Such a reallocation could portend a serious weakening of the dollar, up to 40% of its peak, as was the case between 2001 and 2008.

Kochinos cited inflated asset valuations, changing global trade patterns and a shift in investor focus towards other safe havens as additional risk factors. "As we approach 2026, long-term risk management must come to the fore," the analyst emphasized.

What RBC recommends

To protect against a possible collapse of the U.S. currency, RBC recommends using strategies ranging from synthetic call options on the ICE US Dollar Index to binary options betting on the rise of the euro and yen. Simpler designs are also suggested, including: - a two-year call option on EUR/USD with a strike of 1.3 (approximately 12% dollar decline); - a two-year put option on USD/JPY with a strike of 130 (approximately 15% dollar decline).

RBC's analysis also emphasizes that the current situation is different from the early 2000s, with an increased role for illiquid and private assets in the market, which can amplify fluctuations during periods of market stress.

"The historical experience of the 2000s remains a useful benchmark, but today's unique combination of technological change, geopolitical tensions, and experimental monetary policy requires adaptation as traditional approaches to asset allocation no longer work," Kochinos wrote.

This article was AI-translated and verified by a human editor

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