Barclays says the combination of a weaker U.S. dollar and stronger-than-expected U.S. economic momentum has become an important driver behind recent gains in risk assets, a dynamic the bank describes as having "turbo-charged the reflation trade." In a new equity strategy note, analyst Emmanuel Cau emphasized that a "weaker dollar amid strong US growth is bullish for risk assets," and argued that ongoing volatility in foreign exchange markets has not undermined the advance in equities.
The bank pointed to the persistence of equity strength despite what it called "chaotic price action" across FX and rates. Barclays noted the MSCI World index has continued to post fresh highs while emerging markets appear to have benefited most from the dollar's decline - the MSCI Emerging Markets index is up about 11 percent year to date, the firm said.
Barclays attributed the latest bout of dollar selling to verbal intervention by Japanese authorities and to thinner positioning in currency markets. The bank also flagged the unusual mix of public statements from U.S. leaders, noting that President Trump "endorsed the dollar decline," even as Treasury Secretary Bessent maintained a pro-dollar position. Despite those differing messages, Barclays argued that a weaker dollar combined with a robust U.S. economy should generally be supportive for risk assets.
At the same time, the bank cautioned that the reflation trade may be showing signs of overheating. Barclays described positioning as leaving "little margin for error," and pointed to the "subdued reaction to early Q4 earnings" as an indicator of mounting risk in the current market setup.
Looking to Europe, Barclays said a stronger euro is a "double-edged sword" for regional equities. On one hand, euro strength has been associated with increased inflows; on the other, continued appreciation could undermine exporters and weigh on reported earnings if the trend persists.
Clear summary
Barclays finds that a softer dollar together with unexpectedly strong U.S. growth has reinforced a risk-on market environment, lifting global equities and giving emerging markets a notable boost, while also warning that concentrated positioning and a firmer euro pose tangible risks for parts of the market.
Key points
- Weaker dollar amid strong U.S. growth is seen as bullish for risk assets, per Barclays and analyst Emmanuel Cau.
- MSCI World continues to reach new highs despite volatility in FX and rates; MSCI Emerging Markets is up about 11 percent year to date.
- A stronger euro increases inflows to European equities but risks pressuring exporters and reported earnings if appreciation persists.
Risks and uncertainties
- Concentrated positioning in the reflation trade - Barclays warns that the trade is showing "signs of frenzy," which could amplify volatility and create little margin for error; this particularly affects equity markets and FX-exposed sectors.
- Subdued investor response to early Q4 earnings - Barclays sees muted reactions as a sign that earnings season may not provide immediate reassurance, posing risk to equity performance.
- Euro appreciation - while supporting inflows, continued euro strength could act as a headwind for European exporters and their reported earnings.