Jean Boivin – Head of BlackRock Investment Institute together with Wei Li – Global Chief Investment strategist, Ben Powell – Chief Investment Strategist for the Middle East and APAC, Axel Christensen – Chief Investment Strategist for Latin America all forming part of the BlackRock Investment Institute and Helen Jewell – Chief Investment Officer EMEA, Fundamental Equities at BlackRock share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.
Key Points
Weaker dollar reflects rate cuts : We don’t see this year’s weaker U.S. dollar as a statement on U.S. assets; instead, it mostly reflects market pricing of Fed rate us. Yet drivers could change fast.
Market backdrop : U.S. stocks slid from all-time highs on renewed U.S.-China trade tensions. Treasury yields dipped but stayed in a recent range. Gold hit a fresh record.
Week ahead : The U.S. government shutdown is still delaying key macro readings. But the U.S. CPI will be released on Oct. 24 to provide a key input for the next Fed meeting.
The U.S. dollar’s depreciation this year sparked questions about its haven status and a pullback from U.S. assets. We haven’t seen evidence of that so far. We think the dollar has moved in step with historical drivers – not broken with them. The two main drivers of the dollar’s slide are Federal Reserve rate cuts, consistent with surging U.S. stocks, and the return of term premium as global debt concerns come to the fore, in our view. We also eye how the drop boosts emerging market assets.
The U.S. dollar has weakened this year – mostly in the first half, including after the April 2 tariff announcements that also hit U.S. stocks and Treasuries. See the right chart. That unusual three-way drop raised questions about the U.S. dollar’s reserve currency status and if U.S. assets could lose their appeal – a debate stoked by the summer focus on Fed independence. But we don’t see evidence yet to support such concerns. Yes, the dollar has weakened, but it still looks historically strong versus other major currencies. See the left chart. And it has been mostly flat since the summer, even as tensions around Fed independence grew – holding steady against the euro and strengthening against the Japanese yen. If a structural shift were underway, the dollar would have broken out of its historical relationships with its usual drivers and also weakened against other developed market currencies.
That is not what has happened. Instead, our analysis finds that the dollar’s decline this year very much tracks with two historical drivers of its value. First, rate cut expectations. We find expected Fed easing accounts for about half of the dollar’s drop. Lower rates erode the dollar’s yield advantage over other major currencies. But on the flipside, Fed cuts support U.S. stock gains, already powered by the AI theme.
Global debt concerns return to the fore
Second, the steepening of the yield curve as global debt concerns come to the fore. For years, investors flocked to long-term bonds based on their perceived stability, depressing term premium – or compensation for the risk of holding these bonds – below historic norms even as government debt mounted. We have long highlighted this as a fragile equilibrium that could not hold indefinitely. Indeed, term premium is now returning to more normal levels as concerns about the cost of servicing that debt mount. These fiscal challenges aren’t unique to the U.S.; they are pushing up bond yields and weighing on developed market currencies across the board. That’s why the U.S. dollar hasn’t weakened relative to these currencies – but why all of them have weakened relative to gold.
We think lower rates and the AI theme will still support U.S. stocks but eye selective opportunities elsewhere. In Europe, we have favored Spanish equities, up nearly 60% this year in U.S. dollar terms, MSCI data show. In emerging markets, we prefer local currency debt, such as 10-year Brazilian government bonds that offer a yield of nearly 14%, according to Bloomberg data. A softer greenback means U.S. dollar-based investors get an added boost when converting back – take the Brazilian real, up nearly 12% this year, per Bloomberg. We also see selective opportunities in emerging market stocks: MSCI data show that South Korean and South African equities are up more than 55% this year in U.S. dollar terms. And as rising yields mean long-term developed market government bonds offer less reliable ballast against equity selloffs, we look to gold and bitcoin as potential diversifiers of risk and return.
Our bottom line
We see the U.S. dollar’s slide tied to expected Fed rate cuts and fiscal concerns – not evidence its reserve status is under threat. We stay overweight U.S. stocks, like emerging markets and see gold and bitcoin as potential diversifiers.
Market backdrop
U.S. stocks slid last week after President Donald Trump on Friday threatened fresh tariffs on Beijing over its latest restrictions on rare earth exports and said a planned meeting with Chinese President Xi Jinping was now uncertain. U.S. 10-year Treasury yields dipped but remained in their recent range between 4.00-4.20%. Gold surged past $4,000 per ounce to a new all-time high. The U.S. dollar index hit a two-month high against major currencies before retreating on the tariff news.
The ongoing U.S. government shutdown will likely delay the September CPI and PPI reports. The absence of the key data will keep markets focused on private sector or alternative sets of data until there is a resolution of the shutdown, which could then see this backlog of government data released over subsequent days. The Bureau of Labor Statistics said late last week it would release the latest U.S. CPI on Oct. 24.
Week Ahead
Oct. 12 : China trade balance
Oct. 15 : China CPI and PPI
Oct. 16 : U.S. PPI (scheduled)
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