Dollar drop hurts foreign investors in stocks
A weak dollar makes the stock market more difficult for investors from other countries. The decline in the value of the dollar makes the difficulties that international investors encounter in the stock market much more difficult to manage. European investors in US equities are facing a huge setback as a result of a collapse in the dollar, which is exacerbating losses on stocks. This effectively brings an end to a beneficial cycle of growing share prices and currency appreciation that was observed during Wall Street’s recent record performance. Many individuals have been left bewildered by the decrease in US equities that has occurred this year. They had thought that Wall Street would continue to do exceptionally well. However, a concomitant decrease in the value of the dollar has made the difficulties that foreign investors are experiencing much more difficult. This has disrupted a trend in which currency appreciation generally had the effect of mitigating some of the losses.
The S&P 500, which is considered to be a benchmark for blue-chip stocks, has witnessed a fall of about 4 percent in dollar terms so far this year, while the decline has exceeded 8 percent when measured in euros. According to economists, this has caused a disruption in a self-reinforcing cycle in which European investors contributed to the appreciation of the dollar by expanding their investments in US equities. This, in turn, increased the gains from unhedged stock positions and prompted additional allocations. In comparison to its major peers, the dollar has had a significant increase in value over the course of the preceding two decades, culminating in a remarkable spike in strength at the end of the previous year.
In a statement, Peter Oppenheimer, chief global equities strategist at Goldman Sachs, noted that “it represents a virtuous cycle that has persisted for an extended period of time, but we are now witnessing a reversal.” The downturn in the market in the United States is made worse by the devaluation of the dollar, which results in a more pronounced negative impact when converted back into dollars. In the final three months of 2024, market players boosted US equities to heights that had never been seen before. This was spurred by optimism over technology and predictions of increased corporate earnings as a result of Donald Trump’s vows to reduce taxes. A rise of two percent was seen in the S&P index when measured in terms of dollars, whereas the advance was nearly ten percent when measured in terms of euros.
The dollar, on the other hand, has undergone a big reversal this year as a result of investors reevaluating their expectations over the implications of Trump’s protectionist measures. Investors had previously anticipated that increased trade tariffs would result in a rise in inflation in the United States while having a negative impact on GDP in other regions. This would lead to an appreciation of the dollar and bring the euro closer to parity with the United States currency. As investors have expressed concerns on the pace of economic development in the United States, the dollar has witnessed a depreciation since the middle of January. At the same time, Europe’s vows to greater defense spending have fostered a sense of optimism throughout the remainder of the region.
The view of dollar assets appears to be undergoing a dramatic shift, as shown by the evidence. During times of economic unpredictability, the dollar is generally regarded as a safe haven, and its value typically increases when unfavorable developments have an effect on financial markets around the world. Because of this, overseas investors have been flocking to Wall Street equities without paying charges to hedge against currency swings. This is because the dollar has served as a stabilizing force throughout market downturns, which has brought about the current situation.
George Saravelos, an analyst at Deutsche Bank, observed that the risk-reducing attributes of unhedged dollar exposure have had a substantial influence on portfolio allocation over the course of the last decade. However, he highlighted that this trend is currently undergoing a shift. The recent sell-off in the markets of the United States has resulted in comparable losses for European investors, echoing the more severe downturn suffered on Wall Street in 2022. He emphasized that this can be ascribed to the changing dynamics of the influence of the dollar. According to Saravelos, in the event that the ongoing “correlation breakdown” between equities and the dollar continues, European investors may reevaluate their strategies with regard to US stocks. This is especially true in the absence of currency hedges.
Already, a number of entities are going through the process of transitioning. on a recent poll that was carried out by Bank of America, little more than twenty percent of European fund managers said that they are now underweight on US shares. This represents the highest level that has been reported since the middle of 2023. It is possible that the prevailing pressures on US equities, which have recently entered correction territory, will be exacerbated by an increase in the outflow of capital from Europe. Torsten Slok, the chief economist of Apollo, made the following observation in a recent note: “The potential negative implications for the S&P 500 stemming from foreign divestment are considerable.” Slok was referring to the substantial holdings that foreign investors have built in US shares.
