USD: Diversification hinge for Q2 flows – BNY

BNY’s Head of Markets Macro Strategy Bob Savage argues that USD dynamics are central to Q2 diversification decisions, as the Rest of World equity index has shown a strong correlation with the USD index. With European Central Bank hikes now priced against limited Fed easing odds, EUR/USD has moved higher, while emerging markets face tighter front-end rates due to intervention risks and the need for a clear USD view.

Dollar path key for global rotation

"Since “liberation day,” the S&P 500 rose 26% while the Rest of World (ROW) top 20 companies rose 13%. The correlation of the ROW index to the USD index stands out in the last year. The current rally up in risk and the return of USD selling has been notable, as stock markets outside the U.S. have recovered to pre-war levels, as has the USD."

"The trend divergence between the S&P 500 and the ROW index is stark, particularly for momentum-driven investors."

"The role of the USD in driving investment flows will connect back to the way global companies manage the current supply shock. Margins and earnings in Q2 will be more critical than Q1 making CEO commentary about their outlooks key for moderating expectations."

"The other key factor for investors is the role of rate policy from the Fed and from other central banks. European Central Bank rate hike expectations (two hikes of 25bp in 2026 now priced) versus the Fed (a 40% chance of one cut) drove EUR from 1.15 to 1.18 this week."

"USD dynamics in emerging markets have also been caught in a feedback loop driven by central bank intervention risks. More intervention will keep front-end rates globally tighter."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)