Talking Heads – Any viable alternatives to a US dollar in the doldrums?

Talking Heads podcast recording with John Bradley, Head of Currencies

Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis on the topics that really matter to investors. In this episode, we’ll be discussing the US dollar. I’m Daniel Morris, Chief Market Strategist, and I’m joined today by John Bradley, Head of Currencies. Welcome, John, and thanks for joining me.

John Bradley, Thank you very much for having me.

DM: If we think back to November 2024, there was a consensus trade post the [US] election, besides being overweight US equities, being overweight the US dollar. We anticipated stronger growth in the US, higher interest rates, tariffs being beneficial at least on a relative basis for the dollar. So, tell us what’s been driving the weakness of the US dollar in 2025, and do you expect it to continue?

JB: What took the market by surprise was when the Trump administration aggressively started to talk up broad-based tariffs. That became a big headwind for growth in the United States and also had a higher inflation implications. That combined to create a headwind for the dollar. And that occurred in an environment where the market was very long dollar assets. What we saw is that these purchases of dollar assets had largely been unhedged. In March and April, we started to see big unwinds of those long dollar positions, a sea change in perceptions around the desirability of owning long dollar assets, especially in an environment where US growth expectations had started to wane. Combining with that, we have seen some response outside the US: fiscal stimulus coming out of Germany. We’ve seen rotation back into local assets and a big increase in hedging of US exposures.

DM: You talked about the expectation that the high tariffs would have a big impact on US growth, potentially pushing up inflation. The interesting thing is that so far, honestly, we haven’t really seen that. Nonetheless, most investors are expecting it’ll arrive at some point, which then leads us to the outlook. What currencies do you think can outperform the dollar in the second-half of 2025?

JB: The currencies that we think can trade best in this environment are currencies [that] are going to see inflows either because people want to own those assets or because it’s been driven by hedging of US exposure. The currencies we really like are those in countries that have big positive current account positions and also very positive net international investment positions, countries that see large foreign ownership of assets. Those are typically Scandinavian currencies in Europe, so Norway and Sweden, but also Switzerland, Japan and to a lesser extent, Europe. Among those, we really have favoured Europe. In Europe not only do you have these repatriation flows and the hedging of US assets, but there’s also desirability to own European assets. They have large liquid equity and fixed income markets. They provide an alternative to dollar assets. In addition, we are seeing fiscal stimulus from Germany. It has a very low debt to GDP ratio. It is seen as a country that has the scope to increase fiscal spending in a responsible way. One of the headwinds for the dollar over the coming quarters will be the fact that you have a very large fiscal deficit, looking at 7% of GDP. That can create pressure on longer-end US fixed income and be a dollar negative.

In addition, we do continue to like the Japanese yen. It’s more of a waiting game there. Unfortunately, the Bank of Japan has been very slow to hike rates. And so, the yield differential between US assets and Japanese rates is very large. It’s currently a little over 4%. In that environment, it’s expensive for the Japanese to hedge their US exposures. For the yen to begin to rally, one of the prerequisites will be for the [US] Federal Reserve to start cutting interest rates. We think that will happen sometime in the second-half of the year. But it might be a longer wait.

DM: We look outside of developed markets and think about emerging markets. Now, on one hand, you worry about growth given the US tariffs. A lot of countries in southeast Asia rely on exports to the US as a primary driver of growth. That model is going to be challenged. What are the implications for EM currencies? Do you see any interesting opportunities?

JB: We’re more bullish on emerging market currencies than we have been for quite some time. Historically when you enter a weak dollar market, that’s usually a bullish environment for emerging market assets, specifically, fixed income markets and equities. That creates a positive reinforcement for the currency. Lower yields drive bond inflows from foreigners and also make local equity markets more attractive. So, you see inflows into equity markets – that strengthens the currency, which allows the central banks to cut rates more. You get this positive dynamic that that can really feed into currency strength. We do prefer at the moment higher-yielding Latam currencies, specifically Mexico, Brazil, and the South African rand. We’re entering a virtuous cycle there.

In non-Japan Asia, it’s more complicated. A lot of the currencies have big current account surpluses and big positive net international investment positions, but they have big trade exposures to the US. So, there could be headwinds on the trade front. For some of these currencies, as part of the trade deal with the United States, there will be some agreement to allow the currencies to appreciate, specifically, in non-Japan Asia. We continue to like [South] Korea [and] tactically trade Taiwan. It‘s a relatively small market and can be fairly liquid. It’s a currency that has some scope to appreciate.

DM; If I can highlight some of the key points, we talked about the dollar being one of the big consensus trades, a crowded trade. When you had a trigger, in particular the announcement of much higher tariffs than investors expected, it was a perfect storm to use an analogy for a change in how the dollar was moving. More recently, the big, beautiful bill [was] arguably another factor that’s going to promote dollar weakness. If you look to what currencies you do like, you mentioned Scandinavian currencies, the Swiss currency, the euro, Japan, but you also are more positive towards EM currencies. Well, John, thank you very much for joining me.

JB: It’s my pleasure.

DM: That’s it for this week’s episode of Talking Heads. If you would like more information about our foreign exchange capabilities, please reach out to your BNP Paribas Asset Management contact or check out Viewpoint, our website for investment insights at viewpoint.bnpparibas-am.com. Just before we go, I’d like to mention that the Talking Heads podcast is available on Spotify and YouTube. For YouTube, visit youtube.com/BNPP AM slash playlist and tap or click on Talking Heads.  You’ve been listening to the Talking Heads Podcast with me, Daniel Morris, and John Bradley, Head of currencies. Please do join me next week. Until then, take care.