Did you make a mistake with the "currency devaluation trade"? JPMorgan Chase: Don't rush to short the dollar; a better option is to short low-interest currencies.

"Currency devaluation trading" has been prevalent for many years, but if it is simply understood as shorting the US dollar, it may be a misguided approach. A recent analysis by JPMorgan Chase suggests that while fiscal deficits, inflation, and monetary expansion do drive capital flows to assets such as gold and commodities, the fact that hard assets benefit from declining currency purchasing power does not necessarily mean that the US dollar must collapse in tandem.

JPMorgan Chase points out that in a global inflationary environment, the US dollar actually offers strong protection against real yield fluctuations. Currently, the market-priced US real policy rate is close to 2%, and the dollar's yield advantage relative to other global currencies is at its highest level in nearly four decades; the dollar's current yield is higher than that of over 50% of global currencies, the highest in 25 years. At the same time, the bank estimates that the dollar is undervalued by approximately 3% to 4% compared to its fair value.

This means that what's more worthwhile to trade right now is not a "comprehensive depreciation of the US dollar," but rather the differences in real yields and interest rate differentials between different currencies. JPMorgan Chase suggests that hard assets can still serve as the core position for "depreciation trades," while in the foreign exchange market, it's more suitable to go long on the US dollar and short on low-yielding currencies that are sensitive to economic cycles.

The real yield advantage supports the US dollar.

JPMorgan Chase's core judgment is based on real yields and interest rate differentials. Currently, the US real policy interest rate remains relatively high, and the US dollar maintains a significant yield advantage relative to other major currencies, meaning that the US dollar remains highly attractive for holding.

Meanwhile, JPMorgan Chase estimates that the US dollar is undervalued by about 3% to 4% compared to its fair value. This means that the US dollar currently has a clear advantage in real yield and is not overvalued, providing a certain safety cushion for the dollar and increasing the difficulty of directly shorting it.

More importantly, inflation is not a problem unique to the United States. Global inflation is prevalent, and central banks around the world are tightening monetary policy in tandem. The US dollar does not have the conditions to continue weakening simply because other economies have significantly looser monetary policies.

JPMorgan Chase, citing the "dollar smile" theory, points out that as long as the global economy remains resilient and US yields continue to be higher than those of other economies, the dollar may still maintain a strong performance in the middle scenario of the "smile curve" of stable global growth.

Carry trade is a better way to express this.

Therefore, in JPMorgan Chase's view, if investors are bullish on inflation and declining currency purchasing power, a better way for the foreign exchange market to express this is not by shorting a basket of dollars, but by trading the relative interest rate differentials between different currencies.

The bank favors currencies with higher real yields that provide a yield buffer, including some high-yielding currencies of energy-exporting countries. Conversely, currencies with lower real yields and a high dependence on the economic cycle are more likely to be pressured by interest rate differentials and growth pressures.

The Swedish krona (SEK), New Zealand dollar (NZD), and Canadian dollar (CAD) are listed by JPMorgan Chase as the more vulnerable currencies. Taking the Canadian dollar as an example, despite its commodity exposure, this advantage is not enough to fully offset its strong cyclical sensitivity and relatively weak interest rate differentials.

Therefore, from a tactical perspective, a more appropriate trade is not to bet indiscriminately on a decline in the US dollar, but to go long on the US dollar against these low-yielding, cyclically sensitive, and vulnerable currencies, expressing a "depreciation trade" through relative interest rate differentials rather than absolute direction.

The Japanese yen is the main exception.

The Japanese yen is a major exception to this "long dollar" framework. Potential portfolio rebalancing by the Government Pension Investment Fund of Japan (GPIF) could generate substantial yen buying; meanwhile, the Bank of Japan's accelerated policy normalization is also enhancing the yen's tactical appeal.

However, JPMorgan believes that further strengthening of the yen still requires genuine policy implementation. The bank maintains its baseline scenario of USD/JPY in the 155-165 range; a sustained breakout to the downside would likely require a significant deterioration in the US economy or explicit intervention by US authorities to weaken the dollar.

In addition, the yen has appreciated rapidly recently, and the USD/JPY exchange rate has entered a deeply oversold zone, which means that some of the bullish expectations for the yen may have already been priced in by the market.

JPMorgan Chase ultimately emphasized that "currency devaluation" should not be equated with "dollar collapse." Hard assets such as gold and commodities can still benefit from declining purchasing power as long as the dollar does not weaken across the board, while the dollar itself is supported by high real yields, strong interest rate differentials, and relative undervaluation.

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