The first Fed rate cut of 2025 and the promise of more to come have largely determined what happened in financial markets over the past month or so.
The prospect of a stable monetary policy from the ECB, as indicated by several governors, could have far-reaching effects. This could further narrow the rate differential between the US and Europe's EMU (Economic and Monetary Union), potentially reshaping the global financial landscape.
That, in turn, weakened the greenback and pushed the euro to multi-year highs, close to 1,19 USD per € in the immediate aftermath of the Fed decision. The euro was last seen that close to parity back in 2021.
Naturally, this period of dollar weakness raises questions as to whether the US currency is likely to fall much further. With the US dollar now close to its equilibrium level, it's worth considering what could push the greenback even lower, even as the US economy looks set to maintain its edge over the Eurozone.
Weak dollar may lower Europe’s inflation
The weak dollar has some advantages for the Eurozone. Since several commodities (and in particular energy prices) are priced in USD, a weaker dollar makes these products cheaper for the euro-based buyer/consumer. That, in turn, helps limit inflation.
It's not the only factor. Weak household demand and private investment, as well as the continued arrival in Europe of products from elsewhere (particularly from Asia) that no longer reach US markets due to Trump's tariffs, could all help keep inflation low in the Eurozone.
ECB members may soon find themselves with an uncomfortably low inflation rate. At the same time, the strong euro is terrible news for European exporters.
The USD has fallen by some 5% versus the euro over the past year. But the greenback has been far from alone. The Chinese yuan (-6%), Japanese yen (-7.5%), Korean won (-10%), and many other Asian currencies have followed the USD on its downward path.
The ECB may also lower its rates
That, in turn, means EMU exporters' competitiveness has been under pressure. This is not just due to US tariffs, but also to a less favourable exchange rate compared with many Asian competitors. So, the euro has appreciated against the greenback, while many others have stabilised or even lost some ground.
With EMU exporters screaming for help, there's a good chance the ECB will cut rates, stabilising the EUR/USD exchange rate.
For US stocks, the weak dollar is relatively good news. On the one hand, it favours exporters. On the other hand, it makes the foreign earnings of US companies look far more impressive (in USD terms).
Add to that the fact that Trump's tax reform is likely to give companies and the US consumer a bit of a boost, that credit is expected to get slightly cheaper over the next few quarters, and that the US economy is still doing rather well (after 3.3% growth in Q2, Q3 GDP should be equally impressive with the Atlanta Fed's GDPNow indicating an increase of about 3.4%).
There are therefore good reasons to stay invested in the USA and to think that, after a challenging start to the year, US stocks could once again outperform their EMU counterparts.
Good news for emerging markets
A lower dollar and cheaper credit in the USA have profound implications for the rest of the world, particularly for emerging markets.
For those countries, heavily reliant on investment and often with very few savings of their own, the price of credit constitutes a vital element in their capacity to grow. It’s therefore no surprise that stock markets in Mexico or Brazil all enjoyed a good month.
In Asian markets, the tech sector has been doing well, with Chinese (+7%) and Korean stocks (+10%) both enjoying a good month, driven by the US tech sector and the world's insatiable appetite for semiconductors.
For the following months, and given the complex risk landscape, keep loyal to your long-term strategy and maintain a good level of diversification. See below our complete asset allocation suggestion:
