Market Shows First Concrete Signs of Return of Weak Dollar Thesis

Money has started to flow back towards gold. Last week, precious metals and cryptocurrency funds recorded their largest inflows in several months, with the metal reaching its highest point since mid-May, and the dollar experiencing a significant decline this month against major currencies. These are the first concrete signs that a thesis which dominated 2025, energized the beginning of this year, and lost momentum from mid-2026 may be returning: that the American currency tends to depreciate over time.

The thesis, referred to abroad as the debasement trade, is based on the idea that when a government becomes overly indebted and begins to intervene to keep the interest rates it pays low, distrust grows that sooner or later, the bill will be paid with a weaker currency. Those who believe in this buy what cannot be printed: gold, commodities, and more recently, Bitcoin (BTC).

The catalyst was the U.S. Treasury's decision to expand the buyback of long-term bonds at a time when the 30-year bond yield was hovering near its highest level since 2007. The announcement lowered long-term interest rates and weakened the dollar, pulling the cryptocurrency market out of months of lethargy, but the relief was short-lived and yields began to rise again.

Last week, exchange-traded funds (ETFs) for precious metals attracted $4.6 billion, almost all in gold, while cryptocurrency funds received $2.8 billion. The GLD, the world's largest gold fund, alone accounted for $3.4 billion. At the same time, stock ETFs saw weak inflows, and those in the American financial sector recorded the largest outflows.

"We believe that the gradual diversification away from the U.S. dollar, and a trend of depreciation in the medium to long term, will remain intact," writes the investment team at UBS, led by global chief Mark Haefele, in a report published this Tuesday (25). Analysts say that tensions in the Middle East and higher oil prices may provide some support for the currency in the short term, but the American fiscal trajectory, uncertainty over trade policy, and growing evidence that several countries are reducing their dollar share in reserves continue to support the weakening thesis.

Gold is the main beneficiary in this scenario. UBS projects an ounce at $5,400 in 12 months and notes that official purchases remain strong, with the Chinese central bank increasing its reserves by 20 tons in July, the largest monthly purchase since October 2023.

The bank suggests exposure to commodities in general, betting that demand for oil remains strong and that industrial metals should benefit from electrification and the construction of artificial intelligence infrastructure. In currencies, it sees the euro moving towards $1.20, aided by an expected interest rate hike from the European Central Bank in September, but maintains a neutral stance on the currency and prefers higher interest rate currencies like the pound and the Norwegian krone.

JPMorgan, however, disagrees with this diagnosis. For the bank's currency analysts, the dollar's decline seems more like a rush to unwind positions than a real turnaround. "The currency markets seem to be forcing an explanation for the dollar's weakness," write the strategists.

The reasoning has three pillars:

1. The buyback of bonds is not money printing: the Treasury exchanges old bonds for new ones, without creating new liquidity in the banking system, which is what usually erodes a currency.
2. The size is small, around $14 billion on the bank's own account, compared to over $30 trillion in negotiable American bonds in circulation and a total public debt that already exceeds $40 trillion.
3. According to JP, the evidence that usually accompanies a weak currency scenario has not appeared, with contained inflation expectations and a currency market that is not differentiating currencies by fiscal quality as it did last year.

For the bank, the thesis only holds if the Federal Reserve accepts living with high inflation to enable government spending, something that strategists classify as "a huge leap of judgment, for which there is no factual support at this stage." For now, analysts see a contrary signal: according to the analysis metrics used by analysts, the minutes from the Fed's July meeting conveyed the toughest tone in almost two years, and the market still assigns more than a 40% chance to an interest rate hike in September.

But a test is approaching. The Personal Consumption Expenditures (PCE) price index for July is set to be released this Wednesday (26), with a projection of 0.32% for the core monthly by JPMorgan, above the 0.20% consensus from Bloomberg. And on Friday (28), Kevin Warsh will give his first speech as Fed chairman in Jackson Hole. The expectation is that a tougher tone will take the wind out of gold, while a softer one will fuel bets against the dollar.

Here, the weak dollar abroad has already appeared in exchange rates, interest rates, and commodities, but not yet in the stock market. The real rose 1.6% last week and has accumulated a 6.1% appreciation this year, the future interest rate curve has eased, and the Ibovespa advanced 2.5% in reais. Measured by MSCI Brazil, in dollars, the Brazilian market rose 2.7% last week, compared to 0.8% for the average of emerging markets, but not due to foreign inflow.

There was a net outflow of R$ 8.4 billion of foreign capital from B3 last week and R$ 22 billion in August. In the accumulated total for 2026, the balance is still positive at R$ 14.4 billion, compared to R$ 25.5 billion for the entire year of 2025. Meanwhile, Brazil ETFs traded abroad lost US$ 268 million in a week and US$ 868 million in the accumulated four weeks.

What seems to have driven the stock market was the same rotation seen abroad, not new money. In Itaú BBA's classification, the commodities block is up 25.3% this year, while the financial sector has fallen 11.5% just in August. For the month, the Ibovespa is down 3.9% in reais, and the MSCI Brazil is down 3.5% in dollars, while emerging markets are up 3.2%.

The discount remains on the table: the Ibovespa is trading at 8.1 times the projected earnings for the next 12 months, about 21% below the average of the last decade.

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