JPMorgan: Better to Short Low-Yield Currencies Than the Dollar Directly
nashnova research
JPMorgan argues the popular "short the dollar" trade may be pointing the wrong way — the greenback is undervalued by 3%–4% with a yield edge at a four-decade high, and the real debasement trade runs through shorting low-yield, cycle-sensitive currencies instead.
Why doesn't "currency debasement" equal "weak dollar"?
Fiscal deficits, inflation and monetary expansion are pushing capital into gold and commodities — but these hard assets benefit from falling purchasing power across all currencies, not just the dollar.
This means → making money buying gold does not prove shorting the dollar will also work; the two trades rest on different logic.
In plain terms = inflation erodes the purchasing power of every paper currency, not the dollar alone — equating "buy gold" with "sell USD" confuses two separate bets.
What keeps the dollar supported?
JPMorgan estimates the dollar is roughly 3%–4% below fair value — cheap, not expensive.
The U.S. real policy rate sits near 2%; the dollar's yield advantage over the rest of the world is at a four-decade high — it outyields more than 50% of global currencies, the highest share in 25 years.
This means → holding dollars already earns a carry; shorting the dollar means paying that spread first, a high hurdle.
What does the "dollar smile" theory say?
The "dollar smile" — a model where the dollar is strong when the U.S. economy is either booming or crashing, and weak only in the middle — suggests that as long as global growth holds and U.S. yields stay ahead, the dollar can remain firm even in a middling scenario.
With inflation widespread globally and central banks tightening in lockstep, there is no obvious gap in monetary policy loose enough to drive sustained dollar weakness.
In plain terms = for the dollar to truly weaken, either other countries' rates need to catch up or the U.S. economy needs to deteriorate sharply — neither condition holds today.
What is the smarter trade?
JPMorgan's recommendation: instead of shorting the dollar across the board, go long USD against low-yield, cycle-sensitive currencies — express the debasement view through relative carry, not outright direction.
The currencies flagged as vulnerable: the Swedish krona, New Zealand dollar and Canadian dollar.
The Canadian dollar, for example, has commodity exposure — but that edge is not enough to offset its high cyclical sensitivity and relatively weak carry.
This means → for the same "bet on debasement," shorting these weaker currencies offers better odds and lower carry cost than shorting the dollar.
Why is the yen the exception?
The yen is the main exception to the long-dollar framework. Potential portfolio rebalancing by Japan's Government Pension Investment Fund (GPIF) could generate sizable yen buying, and the Bank of Japan's accelerating policy normalisation adds tactical appeal.
JPMorgan's base case, however, keeps USD/JPY in the 155–165 range; a sustained break lower would require a clear U.S. economic downturn or explicit official intervention to push the dollar down.
The bank also cautions: the yen has already rallied sharply and USD/JPY is in deep oversold territory — some bullish expectations may already be priced in.
This means → the directional call on the yen may be right, but the entry odds are no longer as symmetric — even the "right trade" can be "bought too expensively."
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