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|13 min ReadDollar Devaluation Risk: How Trump And The Fed Could Break The Market Hedge
Jax Morales
Senior Analyst
Published
Jan 16, 2026
Alpha Briefing: A macro strategist warns that an engineered devaluation of the US dollar, driven by Trump’s weaker-dollar agenda and a more dovish Fed, could trigger a major volatility shock where US equities and the dollar fall together. With foreign capital crowded into US assets, the next 12 months could see cross-border flows reverse and valuations repriced, turning dollar weakness from a tailwind into the main risk for global markets.
Every cycle has one big blind spot. In this one, it is the dollar. Investors still treat dollar weakness as a friendly backdrop that lifts risk assets. They still assume the Fed will always be able to bail out equities without wrecking the currency. The author of this macro report believes that view is dangerously wrong. He argues that the next huge spike in macro volatility will not come from subprime mortgages or a pandemic. It will come from a deliberate weakening of the dollar against major currencies, at the exact moment when foreigners are most exposed to US assets.
Quant funds and AI tools are squeezing out simple statistical edges. What remains is slow, structural macro risk playing out over longer horizons. The quality of the idea matters more than ever. Here, the core idea is simple but uncomfortable. If the dollar is pushed lower as policy, and that push collides with extreme cross-border positioning and stretched valuations, US equities can sell off hard even as the dollar drops. The old “dollar down, stocks up” rule breaks.
A fragile dollar machine built on foreign flows
The starting point is the US role in global trade. America buys everyone else’s goods. The rest of the world takes dollars in return, then recycles those dollars back into US assets so they can keep exporting. It is a beautiful loop. The US imports cheap goods. Foreigners hold dollar assets. Capital flows back into the US again and again.
Over time this has created a structural imbalance. The US current account deficit is extreme. On the other side, foreign investment into US assets is at record highs.
When foreigners buy US assets almost indiscriminately to preserve trade access and capture US growth stories, they push up equity valuations. That is one reason the S&P 500 price-to-sales ratio is sitting near historic peaks.
Traditional value frameworks built by Graham, Dodd and Buffett grew up in a world with less global trade and less cross-border liquidity. Back then, high market cap to GDP looked like pure speculation. Today, the structure is different. Trade itself creates liquidity. The current account on one side is the capital account on the other side. Balance sheets become cross-collateralized across borders. Prices are not just about domestic earnings. They are about global flows.
That same dynamic helped inflate the last big bubble. Before the global financial crisis, foreign investors poured money into US private-sector debt and mortgage structures.
Michael Burry’s “big short” was really about that fragile capital structure. Liquidity did not vanish randomly. It repriced as domestic and foreign flows shifted. The author finds Burry’s recent writing especially relevant now, as foreign investors once again stand deep inside US risk assets while valuations and cross-border exposure both sit near extremes.
The critical piece is that many global investors treat US exposure as a simple equity bet. In reality they are long two things at once. They own the S&P 500 and they own the dollar. A 10 percent rally in the index does not guarantee a positive return if the dollar drops just as much against their home currency.
This is where the carry trade logic that Brad Setser writes about becomes vital. Many models still assume that the dollar will rally in a crisis, as it did during past panics. That belief has become a “natural hedge” story. Funds stay overweight US assets, skip FX hedging because it is expensive, and tell themselves the dollar will save them if equities fall.
Setser’s warning is sharp. If past dollar rallies were more about carry trades unwinding than “reserve currency safety,” then future stress events might not look the same. The US is now the funding side for many carry trades. The country sits on the receiving end of those flows. If the unwind hits from the FX side, not from domestic credit, the dollar can be the thing that falls.
Trump’s weaker dollar, tariffs and a new Fed team
The macro backdrop shifted again with two big changes in US policy. First, markets have already seen episodes where the dollar sold off at the same time US equities dropped. That is the exact opposite of the classic crisis pattern. In these moves, tariffs and cross-border flows, not domestic delinquencies, led the selling. This is the type of risk that arises from the structural imbalance in the balance of payments.
Second, Trump and adviser Scott Bessent are openly pursuing a weaker dollar. Tariffs are part of a broader strategy to gain leverage in economic conflict with China. The author’s earlier work on China argues that Beijing has used economic warfare to hollow out other industrial bases and build dependence.
When Trump takes office, the DXY starts to fall. That is not a coincidence in this framework. It is the start of a policy path.
Short-end real rates have been a key driver of the dollar index. Higher real rates support the dollar. Lower real rates weaken it.
Trump needs easier monetary policy not just to juice growth, but to help push the dollar lower. That is where personnel comes in. Steven Miran, who understands trade and flow dynamics, has been pushed onto the Fed’s board.
Miran’s first big signal was his dot plot. He placed his projected path for rates a full 100 basis points below other FOMC members. It was a public move toward a more dovish stance and a clear attempt to pull the committee in that direction.
The macro dilemma is sharp. The US is in a genuine economic conflict with China and cannot ignore it. A weaker dollar policy, implemented through lower rates and trade pressure, helps in the short run. It boosts domestic liquidity and offers negotiating leverage on tariffs and trade deals. At the same time, it risks pushing foreign investors to cut US equity exposure just as the currency is sliding. That is how a “friendly” weaker dollar can flip into a trigger for selling.
The timing around the new Fed chair adds fuel. Inflation expectations, measured through two-year inflation swaps, have been falling, which gives the Fed cover to sound more dovish without sparking an immediate inflation scare.
News flow points to a new Fed chair who is likely to be more aligned with Miran than with the more hawkish governors.
If the Fed brings the implied terminal rate, priced in SOFR futures, closer to where inflation expectations have moved, real rates will fall. That would weaken the dollar further.
Recently, rising real rates slowed the dollar’s downtrend. That pause is building a bigger imbalance. It sets the stage for future cuts that could restart the dollar’s slide and stress cross-border positions again.
The political constraints are real. Trump and Bessent have to push a weaker-dollar strategy without triggering a pre-midterm equity crash or a credit spread blowout. They must manage a Fed with governors who are less dovish. They also have to hope that foreign selling does not accelerate into a recession as valuations sit near record levels.
Cross-border flows, AI mania and the trigger signals
The author’s core claim is blunt. The most important risk in markets is an engineered dollar devaluation colliding with fragile cross-border positioning. The market is not pricing this. It still treats a weaker dollar as a simple tailwind. That complacency looks, to him, like the mortgage complacency before the last crisis.
He is building models and strategies around this single tail event, with the goal of being short with size when a true structural capitulation starts. The key is timing. Positioning unwinds in US equities happen often. The driver matters. If the unwind is driven by cross-border flows, the fragility is far greater.
One sign to watch is call skew and FX behavior. Since a recent EURUSD rally during a US selloff, call skew has held at an elevated base. That pattern likely reflects structural positioning risk in cross-border flows, not just short-term hedging.
Anytime cross-border flows drive liquidity expansion or contraction, FX carries the signal. Where foreigners are adding or cutting US equity exposure matters. The author recommends tracking factor and sector performance through tools like https://www.liquidationnation.ai/. The relative performance of factors and themes reveals how aggressive or defensive capital is becoming.
This will be especially important around the AI theme, where more and more capital is crowding into a narrow group of stocks.
The author plans to publish an interview with Jared Kubin, founder of Liquidation Nation, to dig deeper into how these factor flows tie back to cross-border risk. He also points readers to Kubin’s work on X at LINK.
In simple terms, the main timing signals he highlights are these. First, watch for the dollar selling off against major currency pairs at the same time implied volatility rises across assets. FX skew on major pairs, which can be tracked on the CVOL indices, will be a key confirmation. Second, watch for US equities dropping while the dollar falls. The downside will likely be led by high-beta names and speculative themes underperforming as low-quality stocks get hit hardest, which is where factor analytics from Liquidation Nation can help. Third, expect cross-asset and cross-border correlations to move toward one as even a small unwind in the global imbalance spreads from one market to many. Performance of foreign equity markets and factor baskets will become a crucial warning sign. Finally, the most dangerous signal would be a Fed liquidity move that pushes the dollar down further and accelerates equity selling instead of calming it, especially if domestic stagflation pressures show up at the same time, as Brad Setser’s CFR piece on crisis flows warns.
Why the macro end game centers on the dollar
When cross-border selling hit earlier this year, gold and silver did not behave like perfect havens. They rallied a bit, then sold off when real capitulation arrived. They are woven into the same collateral web as everything else.
The author still sees upside in owning precious metals, but he is clear that they will not give diversification during a real volatility blowout. In that kind of event, the only ways to benefit are to actively trade, own proper hedges, be short the dollar and be long volatility.
There is another uncomfortable reality. Cash looks safer emotionally, but real returns on cash are falling. That is pushing capital out the risk curve and into equities, especially at this stage of the credit cycle. Not being long equities carries its own risk when liquidity is still supportive.
For now, the author says he remains long gold, silver and equities because liquidity dynamics still point higher. His detailed equity strategy views are shared with his paying subscribers on his own research platform.
The core macro message is straightforward. Global markets are ignoring the main risk of the cycle. A deliberate weakening of the dollar, colliding with huge cross-border imbalances and extreme valuations, is setting up a volatility shock that rhymes with the complacency before the last crisis. You cannot know the future. You can read the present correctly. The present is flashing pressure signals below the surface.
Understanding these mechanics tells traders which signals to watch as this risk comes closer. Awareness is an edge. The belief that dollar weakness is automatically bullish is as misplaced now as the old claim that mortgages were “too safe” to break the system. This is the quiet build-up to a macro end game where dollar policy and global liquidity structure drive every major asset class.
For now, the author stays bullish on equities, gold and silver. But he is building models to flip bearish and short equities when his signals show incremental increases in this risk. The lesson he draws from past crises is simple. The signs are always visible if you know where to look.
Disclaimer: This document is intended for informational and entertainment purposes only. The views expressed in this document are not, and should not be taken as, investment advice or recommendations. Recipients should do their own due diligence, taking into account their specific financial circumstances, investment objectives and risk tolerance, which are not considered here, before investing. This document is not an offer, or the solicitation of an offer, to buy or sell any of the assets mentioned.