Howard Marks cautions against large shift out of dollar assets despite US fiscal risks

Reports coming in for today mention that Market participants worried around rising US debt, fiscal deficits and the risk of dollar debasement may be tempted to move aggressively into non-dollar assets. But veteran investor Howard Marks believes such a shift carries risks of its own and may not be the straightforward hedge it appears to be.

In his latest memo, “Shall We Repeal the Laws of Economics – Part III”, Marks argues that while market participants can diversify away from the dollar, moving money out of US assets on a large scale could mean giving up some of the advantages that have made American markets attractive.

Marks’ concern starts with US fiscal policy. The US government is running large fiscal deficits even as the economy stays relatively firm, while interest payments on the federal debt are rising.

Marks argues that continued deficit financing could eventually undermine the purchasing power of the dollar, even if the US stays capable of servicing its debt because that debt is denominated in a currency it controls.

The potential investment response would be to own assets denominated in other currencies, gold, non-US real estate or non-US firms.

But Marks cautions against treating this as an obvious solution. “Moving into non-dollar or non-U.S. assets introduces other risks,” he wrote. For one, Marks argues that many developed-market firms outside the US have weaker expansion prospects and less scale than leading American firms. He additionally points to differences in regulation and business environments.

Emerging markets offer a different proposition. They may have stronger expansion potential, but Marks says the challenge is that market participants have less certainty around how much of that potential will ultimately be realised.

That creates an important distinction between hedging dollar risk and finding a superior investment destination.

An investor can reduce exposure to the dollar without necessarily improving the underlying quality of the portfolio. The alternative currency could itself face fiscal problems, inflation or currency depreciation.

“If you move out of dollar assets and into another currency that’s subject to debasement, what have you accomplished?” Marks asks. The dollar’s role in the global financial system is another reason he is reluctant to advocate a large-scale exit.

Marks points out that the dollar was involved in 89% of foreign exchange transactions in 2025 and accounted for 57% of allocated official foreign-exchange reserves in the first quarter of 2026.

The euro stays the second-largest reserve currency, but has not substantially closed the gap with the dollar, while the renminbi accounted for only around 2% of allocated official reserves, according to the figures cited by Marks.

Gold presents a different case. It is a widely held store of value and central-bank reserve asset, but Marks notes that it is not widely used for transactions. Cryptocurrencies, in the meantime, stay a negligible part of official reserve holdings, according to his assessment.

This leaves market participants with a dilemma: US fiscal risks may justify some diversification, but the alternatives come with their own structural and market risks. Marks as a result stops short of advocating a wholesale move away from dollar assets.

“That’s not to say I flatly oppose diversification away from the dollar,” he wrote. “For market participants with non-dollar needs, goals, or aspirations, it may make sense to own fewer dollar-denominated assets.”

But he adds that he does not think diversification away from the dollar should be undertaken “on a great scale” because of the risks involved.

Marks additionally rejects the idea that market participants should simply sell US stocks because of the country's fiscal problems. In his view, the offering is principally with US fiscal management and potentially the purchasing power of the dollar, rather than with American firms themselves.

The distinction matters for portfolio construction. Moving out of dollar assets can reduce currency exposure, but it can simultaneously introduce exposure to different economies, currencies, regulatory regimes and expansion profiles.

For Marks, the question is as a result not simply whether the US has a fiscal problem. It is whether the potential cost of remaining exposed to that problem is greater than the risks introduced by moving elsewhere.

His conclusion is that market participants should recognise the dollar risk without assuming that a wholesale exit provides an easy solution.