London — Investors’ conviction that US President Donald Trump’s tariffs and debt spree would spark long-term pain for the dollar and US stocks is crumbling, signalling pain ahead for assets across Europe and emerging markets that were boosted by this view.
The dollar, which suffered its worst first-half performance since 1973 this year, is now barrelling towards its first monthly gain of 2025 after the Federal Reserve resisted a rate cut, US growth data was unexpectedly robust and trade war fears eased.
That puts the so-called “rest of the world” trade — predicated on the idea of a crisis of confidence in US assets but according to Barclays analysis mostly driven by investors’ desire to cut exposure to a weakening dollar — at risk, investors said.
On Thursday, futures trading suggested Wall Street stocks were set for a more than 1% daily gain that could end this year’s burst of European equity outperformance, while the euro and Asian and emerging market assets fell sharply.
“It’s one of the biggest positions people have, being negative on the dollar and the US,” Pictet Asset Management co-head of multi-asset Shaniel Ramjee said.
He was preparing to raise his dollar exposure from what he described as “practically zero”, on expectations that US economic trends would start outshining Europe.
A broad dollar revival, he added, might bring 2025’s big market trends to a halt.
And as US rate cut expectations faded on Thursday, some investors said the Fed may support the idea of a dollar recovery to reduce the effect of higher import costs, driven by tariffs, on consumer price inflation.
European stocks, which posted their best-ever quarter relative to the US in the three months to March, are now clocking an 8.4% year-to-date gain against the US S&P500’s 8.1 rise ahead of Thursday’s market open.
As recently as mid-July, conviction that the dollar would weaken was the most crowded trade among global fund managers, Bank of America research showed.
That big anti-dollar bet, valued at $18bn and by far the biggest wager in foreign exchange markets, has run into trouble after the euro, which rose to $1.1789 this month, hit 1.1401 after Wednesday’s Fed meeting.
The common currency, which scored the best six-month run of its 26-year lifetime in the first half of the year, is now heading for its largest monthly drop against the dollar since May 2023.
On Thursday, a gauge of emerging Asian equities slipped more than 1% to a two-week low and MSCI’s broad emerging market currency index headed for its first monthly loss this year.
Britain’s pound, meanwhile, was set for a 1.6% weekly loss, in what would be its worst performance on this metric since January’s UK market rout.
“We’re seeing a rotation into US equities, a rotation in currency markets and a rotation in (market) momentum,” Edmond de Rothschild Asset Management multi-asset head Michaël Nizard said.
He cited Sunday’s framework trade deal between Washington and Brussels as a major reason for the trend, which he did not expect to last until the end of the year, adding that he would buy the euro at around $1.14.
But River Global portfolio manager Bettina Edmondston said a stronger dollar would help tame US inflation, meaning a new so-called Fed put, where the central bank props up falling markets with monetary policy, may have opened up for the greenback.
“I don’t expect interest rates to come down, which intuitively makes you think the dollar should be stronger,” she said.
Monica Defend, head of the investment institute at Europe’s largest asset manager Amundi, said she was sticking to a long-term view that the dollar was set to decline because of Trump’s borrowing plans and consistent attacks on Federal Reserve independence.
But she said she was also prepared to change her view “if growth in the US surprises nicely on the upside”, in a persistent trend from here.
“The US might continue to be exceptional, probably not on the macro (economic) front, but more on the equity market,” she said.
Nutshell Asset Management chief investment officer Mark Ellis said he was not certain the US dollar and Wall Street stocks would keep rising in tandem in August, typically one of the worst months of the year for market volatility.
“Around the end of this week is a good time to take risk off and I’ll be more defensive going into historical summer volatility and weakness,” he said.
Barclays head of European equity strategy Emmanuel Cau, in a July 30 note to clients, issued a different warning.
He noted that trend-following hedge funds called CTAs, whose trades are viewed as a barometer of the dominant market mood, had closed out bets against US Treasuries and cut exposure to European stocks.
A more persistent dollar bounce-back, he said, would be “a key pain trade” for global investors from here.
Reuters
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