CLSA Global Equity Strategy suggests that the recent pause in the US dollar’s rally is offering a temporary boost to emerging markets. However, the firm believes the dollar remains significantly overvalued based on long-term economic fundamentals. By historical measures, the greenback is 30 percent above fair value when compared to the net savings rate.
While President Donald Trump has expressed support for a weaker dollar, CLSA said that his broader policy stance could have the opposite effect. The dollar has overshot its fair value by 3 percent against US 10-year yields, 12 percent against GDP growth differentials, and 30 percent when adjusted for savings rates.
Several key factors could dictate the dollar’s trajectory. More aggressive trade tariffs and heightened geopolitical tensions could strengthen the currency, while potential interference in the Federal Reserve’s independence could weaken it.
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CLSA emphasized that the dollar remains the most significant variable influencing institutional appetite for emerging market equities. A sustained retreat in the dollar could trigger renewed inflows into EM stocks, while continued strength may limit their upside. As global investors assess these dynamics, emerging markets remain at the mercy of US dollar movements.
MUFG Global Market Research report said that the US dollar (DXY) has found near-term support following President Donald Trump’s latest threat to impose 25 percent tariffs on autos, pharmaceuticals, and semiconductors. This could be implemented as early as April 2, 2025, after an ongoing US review of its trade relations with trading partners, which is set to conclude on April 1, 2025.
The ‘Trump era’ has already seen changes in many rules of the game, Uday Kotak said in a recent conference, adding that the primary one being the shift in capital flows. The strength of the US dollar is stemming from an increasing investor inclination to hold dollar assets, unlike the previous ‘era’ where investors were looking at diversifications across asset classes, said Kotak.
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