After weeks of record highs, US stocks slid on Friday following President Donald Trump’s renewed threats regarding US–China trade relations.
While Monday experienced a sharp rebound after President Trump appeared to soften his tough trade rhetoric, some equity strategists at Morgan Stanley have cautioned that a larger-than-expected correction for the S&P 500 is likely if tensions do not de-escalate.
Despite these fears, BlackRock maintained its overweight position in US equities, reiterating its risk-on approach in its latest Weekly Market Commentary.
Speaking on the fund’s weekly video, Ben Powell, chief investment strategist for the Middle East and Asia-Pacific at the firm, addressed concerns regarding the dollar’s safe haven status, stating that BlackRock “doesn’t see any evidence” to support that narrative.
“The dollar stayed mostly flat since the summer, even as tensions around Fed independence grew, and it held steady against other developed market currencies,” Powell said.
“If the dollar’s reserve status was truly under threat, we think it would have weakened against these other currencies.”
Discussions around de-dollarisation and the US dollar losing its reserve status have risen in recent months, with some, like VanEck, even predicting bitcoin’s potential emergence as a primary settlement currency.
However, Powell contended that the current pullback is in line with two simple historic factors: rate cut expectations and rising concerns over government debt.
According to BlackRock analysis, anticipated Federal Reserve rate cuts are responsible for approximately half of the US dollar’s decline.
“A fall in interest rates typically wears down the dollar’s yield carry advantage over peer developed market currencies. But on the flip side, it boosts US equities,” Powell said.
Meanwhile, he explained that as global debt concerns come to the fore, there is now a steepening of the yield curve.
In essence, while investors long flocked to long-term government bonds for perceived stability, this kept the term premium below historic norms. Now with concerns over the cost of servicing increasing government debt, the term premium is now reverting to more typical levels.
“These fiscal challenges aren’t unique to the US,” Powell said. “They’re pushing up yields and weighing on developed market currencies across the board.”
On the other hand, Tim Murray, capital market strategist in the multi-asset division at T. Rowe Price, said there are many reasons to suggest that the US dollar will continue to slide.
Murray noted that since the Fed only recently turned to a rate-cutting cycle, it is just now catching up with world central banks.
“This means interest rate differentials between the US and the rest of the world are narrowing, which tends to dampen the demand for dollars,” he said.
Additionally, he said if the US government continues to incur large budget deficits and doubts persist about the Fed’s independence, the greenback could also continue to decline.
Finally, while the continued strength of US companies – barring Friday’s widespread sell-off – has kept both foreign investors willing to hold dollars, Murray said the Trump administration’s stands on trade and foreign policy could further dampen the willingness of foreigners to own US assets.
Reflection in asset allocations
Given the risk of further dollar weakness, the T. Rowe Price Asset Allocation Committee currently maintains overweight positions in both non-US investment grade bonds and emerging markets local currency bonds.
Meanwhile, BlackRock still anticipates a continued ascent in US stocks, driven by anticipated rate cuts and sustained momentum around artificial intelligence. However, it also identified more selective opportunities going forward.
Among developed markets, Powell said the asset manager is eyeing Spanish equities, which are currently up nearly 60 per cent this year in US dollar terms according to MSCI data.
In emerging markets, he highlighted local currency debt as particularly appealing, offering an additional uplift for US dollar-based investors upon conversion.
Meanwhile, Powell said the asset manager views gold and bitcoin as potential portfolio diversifiers – noting gold’s fresh record.
Looking ahead, BlackRock noted that while the current US government shutdown is still delaying key macro readings, the US consumer price index is set to be released on 24 October. It is expected to provide a key input for the next Fed meeting.
