Report - 1 jully, 2025Global Macro & Currencies:
The US dollar has experienced a historic slide in 2025, falling about 10% year to date — its worst first half since 1973. This dramatic weakness has been driven by a combination of political and economic factors: mounting concerns over the fiscal path under President Trump, ballooning debt loads fueled by aggressive tax cuts, and worries about the independence of the Federal Reserve as markets increasingly price in multiple rate cuts. Additionally, erratic tariff policies and renewed trade tensions have further undermined the dollar’s role as a global safe haven.
While many expected the dollar to strengthen as the US economy outperformed and global risks rose, the opposite has occurred. Instead, European currencies have surged: the euro has climbed nearly 10% against the dollar this year, and sterling has gained almost 9%. Meanwhile, the Japanese yen has remained under pressure, but there are signs that safe-haven flows may soon stabilize it, given rising geopolitical tensions and global volatility.
From a practical investment perspective, the weaker dollar provides a strong tailwind for US multinational corporations with significant overseas revenues. It also supports commodity prices broadly, as seen in gold trading near record highs at around $3,289 per ounce. Investors should consider increasing allocations to hedged international equities or adding European equity exposure, where currency gains can further enhance returns. Moreover, actively hedging USD exposure in global portfolios becomes increasingly important to protect against continued weakness and further policy surprises.
Equities & Sector Rotation Analysis:
US equities have staged a strong comeback in Q2, with the S&P 500 rising 10% in the quarter and hitting record highs. This recovery is largely driven by expectations of lower interest rates, robust corporate earnings, and renewed enthusiasm for technology and AI-focused stocks. Companies like Nvidia continue to lead, with massive gains fueled by AI infrastructure spending and optimism around future growth.
Interestingly, this rebound has narrowed the performance gap with European markets. Earlier in the year, investors rotated into European equities on hopes of fiscal stimulus and infrastructure spending, particularly Germany’s €1tn “whatever it takes” plan. While European stocks still slightly outperform on a year-to-date basis (+7% vs. +5% for the S&P 500), the momentum has clearly shifted back to the US as growth data and earnings resilience support valuations.
Sector-wise, leadership has again become narrow, with technology, communications, and financials outperforming while defensive sectors such as utilities and real estate lag. This suggests a renewed preference for growth and cyclicals over defensive positioning, at least in the short term. Small-cap stocks continue to underperform, reflecting persistent macro uncertainties and a flight to quality.
For investors, this implies a tactical tilt toward large-cap US growth and tech names could still deliver relative strength, but caution is warranted as valuations stretch and volatility could resurface with upcoming tariff decisions and geopolitical risks. European exposure remains attractive for diversification, especially if fiscal initiatives translate into stronger earnings growth, but conviction in execution is needed.
Fixed Income & Yield Curve Dynamics:
In fixed income markets, US Treasury yields have moved lower across the curve, with the 10-year yield dropping to 4.20% after peaking above 4.8% earlier this year. This decline reflects growing market conviction that the Federal Reserve will start cutting rates in September, with futures pricing in as many as five quarter-point cuts through 2025.
The recent dovish pivot by the Fed has significantly improved risk sentiment, driving demand for longer-duration assets. We see strong gains in 20+ year Treasuries (+1.0% on the day), while intermediate and short-term Treasuries have also rallied. The overall move has flattened parts of the curve, suggesting that while markets anticipate lower rates, growth concerns remain, especially as fiscal worries and debt sustainability questions persist.
Globally, yields are following a similar downward trajectory. UK gilts and German bunds have eased, as investors bet on further easing amid weaker economic data and a more cautious ECB stance. In Europe, inflation has cooled below the 2% target, supporting expectations of one more ECB cut before year-end, even as policymakers remain wary of structural inflation risks (like AI-driven wage pressures and supply chain fragmentation).
Credit spreads in US corporate bonds have remained tight, indicating strong appetite for risk despite macro uncertainties. High-yield and investment-grade bonds have both benefited from this supportive backdrop. Meanwhile, emerging market debt has rallied, helped by the weaker dollar and lower global rates, attracting inflows into local currency debt.
For investors, extending duration looks tactically appealing as rate cuts approach, but we remain cautious about heavy exposure to the long end given potential volatility from fiscal developments and geopolitical shocks. Credit remains attractive selectively, with opportunities in high-yield and EM debt, especially for investors looking to capture carry in a lower-rate environment.
Currencies & Dollar Dynamics:
The US dollar has experienced its worst start to a year since 1973, dropping over 10% year-to-date. The dollar index, which tracks it against a basket of major currencies (including the euro, yen, and pound), has fallen sharply as global investors reassess their exposure to the greenback amid Trump’s erratic trade policy, a ballooning fiscal deficit, and concerns over Fed independence.
The immediate trigger has been the combination of rising fiscal risks from Trump's proposed tax bill — expected to add $3.2 trillion to debt over the next decade — and expectations for aggressive Fed rate cuts. The perception that US economic exceptionalism might wane has undermined dollar demand as a safe haven.
The euro has benefited the most, climbing more than 13% to over $1.17 — defying earlier forecasts of a decline to parity. Meanwhile, the pound has gained nearly 9%, supported by relative political stability and a resilient labor market. The Japanese yen has strengthened as well (+12.6% YTD), despite traditionally dovish Bank of Japan policies, with investors treating it as a safe haven amid global trade uncertainty.
In emerging markets, a weaker dollar has lifted currencies and supported local debt. Brazil’s real, Mexico’s peso, and South Korea’s won have all rallied, reflecting strong investor appetite for higher-yielding assets.
However, caution is warranted: with the dollar’s sharp decline becoming a crowded trade, some technical consolidation is likely in coming weeks. We believe the dollar’s longer-term trend remains bearish but anticipate near-term volatility as markets recalibrate positions and digest fiscal developments in the US.
Investors should continue hedging dollar exposures and consider selectively increasing allocations to EM currencies and euro-denominated assets, which stand to benefit from continued dollar softness and potential European growth stabilization.
