More dollar weakness on the way?

The US dollar has lost considerable ground against the Euro by 2025. What are the causes of this weakening? What is the impact on your investments? And how can we position ourselves in a changing valuation landscape? Mark Van Assche, account manager Private Banking and Wealth Office talks about it with Heng-Ta Quach, portfolio manager at KBC Asset Management.
01/10/2025

Economy
- Weakening job growth and shrinking savings surpluses, along with inflation remaining high due to higher import tariffs, are weighing on US consumers' purchasing power. Our economists do not anticipate a recession, and in fact have slightly upgraded their growth forecasts for 2025 and 2026 - though the rate of growth is admittedly slightly lower than in recent years. Overall, therefore, we are still looking at a slowdown in growth.
- Our economists still believe economic growth in Europe will be low.
Commodity prices - inflation
- With energy prices under control and declining wage growth, inflation rates are continuing to fall almost everywhere. Inflation in the euro area is already within the central banks' 'comfort zone'. In the US, however, core inflation remains somewhat higher and the rising import duties are having a noticeable effect on output prices.
- With a number of key trade agreements in place, the new average import tariff is estimated at 16-17% (compared to 2.5% before Trump II). These levies are expected to gradually trickle down into retail prices in the coming months, keeping inflation above the Federal Reserve's target for several more months.
Fiscal and monetary policy
- The 'Big Beautiful Bill', which mainly extends the expiring tax cuts from Trump's previous term, is expected to provide a limited boost to growth. Budget talks are faltering in Congress, sending US government departments into shutdown. China continues to regularly support its flagging economy with new policy measures. In the euro area, the major investments announced for defence and infrastructure are gradually taking more concrete shape, although it looks as if their impact won’t be felt fully until 2026-27.
- The European Central Bank kept its deposit rate unchanged at 2% in July, with further movements dependent on economic data. Our economists do not expect the Bank to cut interest rates further next year. The US central bank (Fed) cited weak the labour market data as a reason for cutting interest rates again (by 25 basis points). Following yesterday’s cut, our economists now think the Fed will cut interest rates five more times before the end of 2026 . Fed chairman Jerome Powell himself, however, hinted yesterday that this was now unlikely.
Bond markets
- Despite weaker growth, falling inflation and lower key rates, bond yields remain at somewhat higher levels in both the US and Europe.
- The fiscal about-turn by the new German government, lifting the ‘debt brake’ and allocating a generous budget to relaunch policy and defence spending, explains the higher yields in Europe.
- The -once again- volatile political situation in France caused interest rates to rise a little further.
- In recent weeks, interest rates have normalised and stabilised somewhat.
Stock markets
- Stock markets have climbed again to new historic highs in recent weeks, with the gains being consolidated. Sentiment was helped by the lack of a serious escalation in the trade war and the promise of cuts in interest rates. Corporate earnings have also supported the rally we have seen since the dip following Liberation Day.
- The US in particular has staged a strong rally, thanks to better-than-expected corporate earnings, supported by a strong performance by large Tech companies and financial firms.
Risks
- On the financial markets, the conflicts in the Middle East and Ukraine have somewhat taken a back seat in recent weeks, but there is nothing to prevent them from flaring up again.
- The political situation in France remains suboptimal, while government departments in the US are going into shutdown.
- The markets are less concerned about these developments for the time being, but sentiment could turn quickly.
In the US, there is no agreement on the budget and government departments are going into shutdown. While the markets don’t seem particularly worried, economists are concerned: key data points will not be available on time, which makes it difficult for the Fed to make a decision on interest rates at the end of this month.
Siegfried top, Senior Investment Strategist KBC Asset Management
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