USD: Key factor for Q2 flow diversification – BNY

The Influence of the US Dollar on Global Investment Strategies

Bob Savage, who leads Markets Macro Strategy at BNY, emphasizes that the movement of the US dollar plays a pivotal role in shaping diversification choices for the second quarter. The performance of the Rest of World equity index has closely mirrored fluctuations in the USD index. As the European Central Bank's anticipated rate hikes are now factored in, and the likelihood of Federal Reserve easing remains low, EUR/USD has climbed. Meanwhile, emerging markets are experiencing tighter short-term rates, largely due to intervention concerns and the necessity for a definitive USD outlook.

Global Market Shifts Driven by Dollar Trends

Since "liberation day," the S&P 500 has surged by 26%, whereas the top 20 companies in the Rest of World index have advanced by 13%. Over the past year, the relationship between the ROW index and the USD index has been particularly strong. The recent upswing in risk assets and renewed selling of the dollar have been significant, with international stock markets and the USD both returning to levels seen before the conflict.

Momentum investors have noted a pronounced divergence between the S&P 500 and the ROW index, highlighting contrasting trends across regions.

The US dollar's impact on capital flows is closely tied to how multinational firms respond to ongoing supply disruptions. For the second quarter, profit margins and earnings will be even more important than in the previous quarter, making executive outlooks crucial for shaping investor expectations.

Central Bank Policies and Currency Movements

Another major consideration for investors is the direction of interest rate policies from both the Federal Reserve and other central banks. The European Central Bank is expected to raise rates twice by 25 basis points in 2026, while the Fed faces only a 40% probability of a single rate cut. These differing expectations have pushed the euro from 1.15 to 1.18 this week.

Emerging markets are also affected by US dollar dynamics, as central bank intervention risks have created a feedback loop. Increased intervention is likely to maintain tighter short-term rates worldwide.

(This article was produced with assistance from an AI tool and reviewed by an editor.)