Global Markets Daily: Tech Support - The AI Boom and The Dollar

The report examines why the US Dollar has not strengthened in line with US equity performance during the recent AI-driven market rally. It identifies equity market breadth, the nature of earnings expectations, and regional differences in outperformance as key factors.

Key Takeaways

• 1.The AI trade has driven US equity outperformance, but the expected US Dollar strength has been tempered because the equity outperformance is largely concentrated in sectors or geographies that have limited FX spillover effects.
• 2.Recent market dynamics, specifically narrow equity breadth and a focus on near-term rather than sustained earnings growth, have weakened the traditional correlation between US stock performance and the Dollar.

Table of Contents

• Global Markets Daily: Tech Support—The AI Boom and The Dollar
• Exhibit 1: Typically, US equity performance versus major DM equity indices (MSCI World ex US) tracks the broad Dollar closely, but that relationship has recently dislocated
• Exhibit 2: US outperformance has been less pronounced versus EM equities than DM equities
• Exhibit 3: US equity inflows are a more significant driver of the Dollar versus EM FX than DM FX
• Exhibit 4: Recent sharp upgrades to near-term US earnings expectations have not generated as much Dollar demand as more sustained earnings power would
• Exhibit 5: US forward earnings growth expectations alone explain much of the residual between Dollar performance and relative equity performance
• Exhibit 6: Equity market breadth appears to limit FX spillovers
• Exhibit 7: Global equities have also benefited from the AI boom (in some cases more so than the US) making the more muted support for the Dollar less surprising
• Exhibit 8: The broader equity impulse has clearly shifted from an expected drag to a support for the Dollar
• Trade Ideas
• Best Trade Ideas Across Assets

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