MacroResearchBoard

The U.S. Dollar And Equities: The End Of An Era? – August 3, 2020

The recent breakdown in the U.S. dollar has caught the attention of global investors, and has raised the question as to whether a change in a key long-term investment trend is unfolding. We think that such a shift is indeed underway.

A just-published report explored the potential for a broad-based rotation in relative performance away from U.S. leadership, including the currency and equity market. We anticipate that it will be a multi-year theme, which is likely to play out in waves rather than abruptly, and should benefit emerging Asia, the euro area, and eventually Japan. Key points from the report included:

• The safe-haven appeal of U.S. assets is slowly eroding and will eventually cause a reduction in the premium they command. Near-term headwinds include the economic bump caused by the second COVID-19 wave and expected turmoil surrounding the upcoming Presidential election.
• A broad-based and lasting rotation will take time to blossom. Investors will need to become more confident in the outlook for global export demand, which will be a slow and choppy process, and to become disillusioned with U.S. economic and political leadership.
• The shift in leadership has begun in the currency market. U.S. equity dominance will also fade but this will take longer to play out, given that the U.S. has a disproportionate amount of the successful global information technology and communication services stocks.