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The recent rebound in the US Dollar (USD) has been a focal point for investors, driven by a combination of trade deals, resilient economic data, and hawkish Federal Reserve (Fed) policies.
Chartered’s latest market analysis provides actionable insights into navigating this dynamic environment. Below is a detailed breakdown of key strategies and market outlooks based on their findings.
USD Rebound and Strategic Implications
Several factors drive the recent rebound of the USD. New US trade agreements have excluded China and India. Strong economic and corporate earnings data have also contributed. Additionally, the Fed has adopted a relatively hawkish stance, holding rates steady for the fifth consecutive meeting.
In light of potential volatility, StanChart advises reducing exposure to US assets. They recommend rotating into Asia ex-Japan equities, such as those in China and South Korea, along with Emerging Market local currency bonds. It is also suggested to prefer shorter maturities in bonds due to delayed Fed rate cuts.
Asset Allocation and Market Preferences
Equities
- Overweight Recommendations:
- China Equities: Supported by government policies targeting tech sector overcapacity and price wars, leading to an improved earnings outlook.
- South Korea Equities: Benefiting from government measures to enhance shareholder returns and parity in US trade deals with Japan, driving re-rating potential.
- Europe Industrials: Positive outlook due to the “zero-for-zero” tariff policy between the US and EU, particularly benefiting strategic sectors like aircraft and parts.
- US Technology: Constructive view, especially during pullbacks, supported by strong Q2 earnings and AI-driven capital expenditure (capex).
Bonds
- Preferred Maturities:
- Focus on 5–7-year USD bonds for balanced risk and return.
- Short-duration US high-yield corporate bonds remain attractive due to resilient fundamentals and lower sensitivity to interest rate changes.
US Economic and Fed Policy Insights
The Fed has kept rates steady for the fifth consecutive meeting, indicating a cautious approach amid inflationary pressures. Notably, two out of 11 Fed members voted for rate cuts, marking the first double-dissent in over 30 years.
US Personal Consumption Expenditures (PCE) inflation rose more than anticipated, complicating the Fed's decision-making. Upcoming jobs reports and inflation data will be crucial for assessing a potential rate cut in September 2025. Market expectations for this cut have fallen to 40%, down from 90% at the beginning of July.
US Trade Deals and Tariff Impacts
| Category | Details |
|---|---|
| Key Agreements | Trade deals finalised with the EU, South Korea, Japan, and Mexico (truce extension) |
| Tariffs imposed on: | |
| - EU, Japan, South Korea: 15% | |
| - Southeast Asia: 19-20% | |
| - Canada: 35% for non-USMCA goods | |
| Pending Tariffs | Tariffs on China and India set to take effect on 7 August |
| Economic Projections | Average US tariff rate to rise to 17.5%, the highest since 1934 |
| Short-term consumer price increases of 1.8% | |
| Estimated GDP growth cuts of 0.5% annually in 2025 and 2026 (Source: Yale Budget Lab) |
US Treasury Borrowing and Bond Market Dynamics
- Treasury Borrowing:
- The US Treasury plans to borrow >USD 1 trillion (approx. >S$1.29 trillion) in Q3, exceeding April estimates.
- 7-year bond auction (USD 44 billion) or (S$56.76 billion) saw a bid/cover ratio of 2.8x, the highest since November 2012.
- Yield Outlook:
- The 10-year yield may rise to 4.5–4.6%, presenting a buying opportunity.
- Current average bond maturity stands at 72 months, up from 49 months during the Global Financial Crisis (GFC) era.
- Strategy: Issuing short-term debt to maintain flexibility and control costs.
USD/JPY Outlook
- Rangebound Expectations:
- USD/JPY is expected to remain between 147–152.
- The Bank of Japan (BoJ) raised its FY2025 inflation forecast to 2.7% but kept rates at 0.5%.
- Support for USD Strength:
- Backed by robust US growth, delayed Fed cuts, and progress in trade resolutions.
Silver Market Analysis
- Performance:
- Silver gained 29% year-to-date (YTD) compared to gold’s 25%.
- Driven by tight supply, strong industrial demand, and safe-haven buying.
- Gold/Silver Ratio:
- Peaked above 100 in April, now at 88, near the 10-year average of 81.
- Recommendation:
- Entry points are less attractive currently; consider waiting for a pullback to USD 34/oz.
US GENIUS Act: Stablecoin Regulation
- Key Provisions:
- Only regulated financial institutions can issue stablecoins.
- Stablecoins must be fully backed by US T-bills or low-risk assets (≤93 days maturity).
- Enforces Anti-Money Laundering (AML) and counter-terrorism standards.
- Positive Impacts:
- Boosts demand for US T-bills, strengthens the USD, and promotes crypto adoption.
- Potential surge in reserve demand from stablecoin issuers.
- Risks:
- Stress scenarios could trigger T-bill sell-offs, disrupting liquidity.
Other Key Economic Data
- US Economy:
- Q2 GDP grew by 3% annualised, surpassing expectations.
- Consumer confidence improved in July.
- Goods trade deficit narrowed to USD 86 billion (approx. S$110.94 billion) in June.
- Global Highlights:
- Euro area GDP grew by 0.1% quarter-on-quarter and 1.4% year-on-year.
- German IFO expectations rose since April 2023 but remain below forecasts.
- China PMIs declined in July, with industrial profits falling in June.
Market Performance Summary (YTD to 31 July 2025, USD Terms)
| Asset Class | YTD Performance |
|---|---|
| MSCI US | +18.6% |
| MSCI Europe | +13.2% |
| MSCI Asia ex-Japan | +8.3% |
| MSCI EM | +7.9% |
| US HY Bonds | +6.2% |
| US IG Bonds | +2.9% |
| Gold | +25.0% |
| Silver | +29.0% |
| WTI Crude | -3.5% |
Bottom Line: Navigating the USD Rebound
The USD rebound presents both challenges and opportunities for investors. By reducing exposure to US assets, rotating into Asia ex-Japan equities and EM local currency bonds, and focusing on shorter maturities in bonds, investors can position themselves strategically.
Additionally, staying attuned to US trade developments, Fed policy shifts, and global economic trends will be crucial for informed decision-making.
Key Takeaways:
- Equities: Overweight China, South Korea, and Europe industrials; monitor US technology on pullbacks.
- Bonds: Prefer 5–7-year maturities; favor short-duration US high-yield bonds.
- USD Outlook: Strengthened by growth, hawkish Fed stance, and trade resolutions.
- Silver/Gold: Wait for pullbacks before entering silver.
By adhering to these strategies, investors can navigate the USD rebound effectively while capitalising on emerging opportunities in global markets.
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Reference: Standard Chartered Weekly Market View
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