Portfolio Manager
Could the US dollar be heading lower?
Despite US Treasury yields of around 5%, a hawkish US Federal Reserve and energy price risks, US equities continue to display the resilience to which most investors have grown accustomed. The latest earnings season showed that US companies continue to prosper, even in the face of higher energy prices. Equity strength beyond the US has also grabbed headlines. Earnings growth outside the US points to resilience in other markets. In Europe, second-quarter earnings per share (EPS) for the STOXX® Europe 600 Index rose by more than 20% year on year, marking one of the region’s strongest reporting seasons in years. Elevated defence spending, accelerating investment in energy security and infrastructure amid reforms, and sustained global capital expenditure (capex) on artificial intelligence (AI) provide further support for growth. Forward-looking indicators are already pointing to above-potential growth, despite the euro area’s position as a net energy importer. Asian equities have shown similar strength.
Global equity market strength and economic growth could point to a weaker US dollar, as the chart illustrates. Historically, rising earnings revision ratios outside the US have led to trade-weighted US dollar weakness, as global investors seek to reallocate capital to markets trading at lower valuations than US equity markets. Although it is becoming harder to establish a base case, a resolution to the conflict in the Middle East could also support equities outside the US, given that regions such as Asia and Europe rely more heavily on Middle Eastern oil and gas imports.
We see potential for a broad-based decline in the US dollar against other G10 currencies, particularly the euro, Australian dollar, New Zealand dollar and Swedish krona. Increased domestic spending by the public and private sectors, the global AI capex build-out and the lofty valuation of the US dollar all support our fixed income team’s view that the greenback could weaken from here. That said, risks remain. A further rise in energy prices amid concerns about the Strait of Hormuz could lead to renewed US dollar strength.