Strong Dollar and the Risk Asset Dilemma
The Return of Dollar Strength
Since the second half of 2025, the Dollar Index (DXY) has been trending upward again. This is the combined result of the Fed's slower pace of rate cuts, geopolitical uncertainty, and the relative strength of the US economy.
Factors Behind Dollar Strength
- Fed Policy: Slower-than-expected pace of interest rate cuts
- Geopolitical Risks: Instability in the Middle East and Ukraine
- US Economic Strength: US economy outperforming due to AI investment boom
- Safe Haven Preference: Increased dollar demand in times of uncertainty
Impact of Strong Dollar on Risk Assets
Bitcoin and Dollar Relationship
Bitcoin has traditionally shown an inverse correlation with the dollar. When the dollar strengthens, Bitcoin prices tend to fall.
The reasons are:
- Alternative Asset Role: Bitcoin is perceived as a hedge against dollar weakness
- Liquidity Effect: Dollar strength implies global liquidity contraction
- Emerging Market Impact: Dollar strength reduces purchasing power of emerging market investors
However, this relationship has been weakening recently. Since Bitcoin ETF approvals, institutional investor inflows have established Bitcoin as an independent asset class.
Impact on Stock Markets
Dollar strength has complex effects on US stock markets:
- Multinational Earnings Decline: Dollar-converted value of overseas revenues decreases
- Export Competitiveness Weakens: US products become less price competitive
- EM Capital Flight: Dollar asset preference leads to emerging market stock weakness
Conversely, it's favorable for domestically-focused companies and those using imported raw materials.
Impact on Korean Markets
USD/KRW appreciation is negative for Korean equities:
- Foreign investors sell due to currency loss concerns
- Import price increases raise corporate costs
- Foreign currency debt burden increases
However, export-oriented large caps like Samsung Electronics and SK Hynix earn dollar revenues, so currency appreciation can positively impact their earnings.
2026 Geopolitical Risk Assessment
Major Risk Factors
- US-China Conflict: Ongoing tensions in semiconductors, AI, and trade
- Middle East Situation: Iran-Israel tensions, oil supply uncertainty
- Ukraine War: Energy market impact from prolonged conflict
- Taiwan Strait: Concerns over increased Chinese pressure on Taiwan
Scenarios if Risks Materialize
- Dollar Surge: Intensified safe-haven preference
- Gold Rally: Traditional safe-haven asset demand
- Commodity Volatility: Sharp swings in oil and grain prices
- Risk Asset Decline: Stocks and cryptocurrency corrections
Asset Allocation Strategy in a Strong Dollar Era
Basic Principles
- Increase Dollar Asset Allocation: Expect currency gains if dollar strength continues
- Diversify: Avoid concentration in single assets or currencies
- Secure Liquidity: Maintain cash allocation for volatility
- Defensive Positioning: Increase allocation to high-dividend stocks and consumer staples
Strategy by Asset Class
| Asset | Strategy | Suggested Allocation |
|---|---|---|
| US Stocks | Mix of large-cap tech + dividend stocks | 30% |
| Korean Stocks | Focus on export-oriented large caps | 20% |
| Bonds | US Treasuries, investment-grade corporates | 20% |
| Bitcoin | Long-term hold, account for volatility | 10% |
| Gold/Commodities | Inflation hedge | 10% |
| Cash | Dollar deposits, MMF | 10% |
Rebalancing Timing
- DXY above 110: Take partial profits on dollar assets
- DXY below 100: Consider increasing emerging market allocation
- VIX above 30: Look for opportunities to add risk assets
Conclusion
The strong dollar era is both a challenge and an opportunity for investors. If dollar strength continues, it favors dollar asset holders, but simultaneously puts downward pressure on risk assets through global liquidity contraction.
2026 is a complex environment where geopolitical risks, interest rate policy uncertainty, and the AI investment boom coexist. In such times, diversification and flexible response are key.
A dynamic asset allocation strategy is needed—appropriately combining dollars, stocks, bonds, cryptocurrency, and commodities, and adjusting allocations according to market conditions. Above all, it's important to clarify your investment goals and risk tolerance, and maintain a long-term perspective that isn't swayed by short-term market fluctuations.