Thoughts on the Market: How a Weaker Dollar Could Boost U.S. Stocks

Podcast Information:

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Description: Short, thoughtful, and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.
• Episode: How a Weaker Dollar Could Boost U.S. Stocks
• Release Date: July 17, 2025

Introduction and Morgan Stanley's Bearish Outlook on the Dollar

The episode begins with Michelle Weaver, US Thematic and Equity Strategist at Morgan Stanley, and Dave Adams, Head of G10FX Strategy at Morgan Stanley, setting the stage for an in-depth discussion on the implications of a weakening U.S. dollar on the U.S. equity market. Michelle references a previous discussion on the impact of a weak dollar on European equities and transitions to the current focus.

Michelle Weaver introduces the conversation by stating:

“Morgan Stanley has a bearish view on the US dollar and this is something our chief Global FX strategist James Lord spoke about recently on the show.” [00:09]

Dollar's Performance and Future Outlook

Dave Adams elaborates on Morgan Stanley's bearish stance, highlighting the dollar's significant depreciation over the year. He emphasizes that their outlook remains one of the most pessimistic in the industry.

“We have been dollar bears this whole year and it has been very out of consensus. But we do think the weakness will continue…” [00:44]

Adams notes that the dollar has experienced its worst first half since 1973, with the dollar index dropping approximately 10% year-to-date. He forecasts an additional 10% decline by the end of the next year, attributing this trend to the convergence of U.S. interest and growth rates with those of the rest of the world and increased FX hedging by foreign investors.

Impact of Tariffs on Currency and Federal Policy

Michelle connects the weakening dollar to broader geopolitical trends, specifically the shift towards a multipolar world and the impact of tariffs.

“When I think about one of the key themes that we've been following this year, it's the multipolar world or a shift away from globalization to more localized spheres of influence.” [01:28]

Dave Adams explains how tariffs influence both inflation and U.S. growth:

“Tariffs have a positive impact on inflation but a negative impact on US growth. This puts the Fed in a really tough spot...” [01:49]

He discusses the resulting pressure on the Federal Reserve to maintain a tight monetary policy, which in turn leads to rate convergence globally—another factor contributing to the dollar's decline.

Foreign Investor Hedging Behavior

The conversation shifts to how foreign investors are adapting to the dollar's weakness, particularly through hedging activities.

“Foreign investors own a massive amount of US assets. European investors alone own $8 trillion of US bonds and stocks…” [02:46]

Dave Adams highlights that while many foreign investors have historically not hedged their dollar exposure, there is a growing trend towards increased hedging due to favorable conditions:

“We do think they've started hedging more, but the bulk of the move is really ahead of us.” [02:46]

He estimates that a significant portion of European holdings remains unhedged and anticipates substantial capital flows as hedge ratios increase, potentially amounting to hundreds of billions of dollars.

Implications for U.S. Companies and Earnings

Michelle delves into how a weaker dollar serves as a tailwind for U.S. multinational companies. She explains the "translation effect," where revenue earned in foreign currencies translates to higher dollar amounts when the dollar is weak.

“The weaker dollar is a substantial underappreciated tailwind for US Multinational earnings.” [04:51]

She observes that this positive impact is not widely discussed in earnings calls, as companies typically focus on the challenges posed by a strengthening dollar rather than the benefits of a weakening one.

Benefiting Sectors and Investment Implications

The discussion identifies specific sectors and investment styles that stand to gain the most from a weaker dollar.

Michelle Weaver outlines that large-cap companies with significant international exposure—especially in technology, materials, and industrials—are likely to benefit:

“Tech, materials and industrials have the highest foreign revenue exposure and thus can benefit a lot from that dynamic we've been talking about.” [06:14]

She emphasizes that sectors with high earnings revision sensitivity to the dollar will see the most substantial benefits, making them attractive investment targets.

Conclusion and Investor Advice

In wrapping up, Michelle advises investors to monitor industries and companies that are poised to benefit from the continued weakness of the dollar. She underscores the importance of understanding currency dynamics as a critical driver of earnings and equity performance in a multipolar world.

“As the dollar continues to weaken, investors should keep a close eye on the industries and companies poised to benefit the most...” [07:13]

Dave Adams and Michelle Weaver conclude by reinforcing the strategic importance of these insights for investment decisions, encouraging listeners to incorporate currency trends into their market analysis.

Key Takeaways:

• Morgan Stanley maintains a highly bearish outlook on the U.S. dollar, predicting a further 10% decline within the next year.
• Tariffs contribute to dollar weakness by increasing inflation and suppressing U.S. growth, leading to potential rate convergence globally.
• Foreign investors are beginning to hedge more against the dollar, which could result in significant capital flows.
• A weaker dollar benefits U.S. multinationals through the translation effect, boosting their earnings from overseas operations.
• Large-cap sectors such as technology, materials, and industrials are the primary beneficiaries of a weaker dollar.
• Investors should focus on industries and companies with substantial foreign revenue exposure to capitalize on the ongoing dollar weakness.

This comprehensive analysis offers valuable insights for investors seeking to navigate the implications of currency fluctuations on the U.S. equity market.