Podcast Summary: Thoughts on the Market – "The End of the U.S. Dollar’s Bull Run?"

Published on July 16, 2025, by Morgan Stanley

In the July 16, 2025 episode of Thoughts on the Market, hosted by Paul Walsh, Morgan Stanley delves into the evolving dynamics of the U.S. Dollar's performance and its far-reaching implications for the European stock market. Featuring insights from Marina Zavolok, Chief European Equity Strategist, and James Lord, Chief Global FX Strategist, the discussion unpacks the structural shifts in currency strength and corporate hedging strategies amidst a changing economic landscape.

1. The Declining Trajectory of the U.S. Dollar

The episode opens with Paul Walsh addressing the unexpected persistence of the U.S. Dollar's weakness throughout the year, defying the earlier bullish consensus. James Lord elaborates on this shift, highlighting that contrary to the initial expectations of continued U.S. Exceptionalism under the Trump administration—which projected robust growth, capital inflows, and a strengthening dollar—several factors have altered this trajectory.

James explains, “[From 2010 all the way through to the end of last year. The dollar has been on a tear.]” ([02:49]).

He attributes the dollar's structural decline to a combination of slowing U.S. growth projected through 2025 and 2026, restrictive immigration policies, insufficient fiscal stimulus, and escalating trade tariff uncertainties, particularly concerning Section 899. Additionally, the anticipation of the Federal Reserve cutting rates to 2.5% is expected to further weaken the dollar. James emphasizes that the dollar’s 15-year bull run is now facing a significant downturn, leading to profound macroeconomic implications.

2. Impact on the European Stock Market

Marina Zavolok takes the conversation forward by analyzing how the weakening U.S. Dollar intertwines with the European stock market's performance. Transitioning from her background in emerging markets to European equities, Marina notes a surprising underestimation of FX's role in European markets.

She states, “[Different types of hedging policies that you have for those particularly you have hedging for transactional FX mismatches.]” ([04:27])

Marina outlines a comprehensive framework developed to assess FX exposure across various stocks and sectors. Her analysis reveals that while a small segment of the European index benefits from Euro strength—experiencing significant outperformance—the majority faces challenges. Specifically, over half of the European index is adversely affected by Euro and other local currency strength, particularly impacting companies with substantial dollar or emerging market exposures.

Key sectors such as Utilities, Real Estate, and Banks showcase positive exposure and are outperforming the broader European index, a trend Marina anticipates will continue into the upcoming earnings season. Conversely, companies with heavy FX mismatches are likely to encounter earnings downgrades, posing risks to their financial performance.

3. Corporate Hedging Strategies in a Weakening Dollar Environment

The discussion shifts to corporate responses, focusing on hedging strategies employed to mitigate currency risk. Marina highlights that approximately half of the European index faces some level of FX mismatches, encompassing intra-European currency differences and exposures from sourcing goods from regions like Asia or China.

She points out, “[Companies that have advanced hedging FX hedging programs, they first of all, they tend to outperform when you compare them to companies with limited or no hedging despite having transactional mismatches.]” ([08:49])

Marina's analysis underscores that companies with sophisticated hedging programs not only outperform their less-hedged counterparts but also exhibit lower share price volatility. This observation suggests that proactive FX management is not merely a risk mitigation tool but also a potential source of alpha.

James Lord builds on this by discussing tactical adjustments companies can make in their hedging approaches. He advises that corporations consider altering hedge ratios and timing, as well as diversifying the instruments used—from spot and forward markets to various option strategies—to better align with the current market environment. James recommends reviewing their colleague Dave Adams’ report for detailed strategies tailored to different market conditions.

4. European Earnings and the FX Translation Effect

Marina Zavolok concludes with a critical examination of European earnings growth, contrasting local currency results with dollar-denominated figures. She observes that while European earnings growth in local currency is stagnating near 1%, potentially tipping into negative territory by the end of the earnings season, the situation is markedly different when viewed in dollar terms.

She explains, “[European earnings growth now on consensus estimates for this year is approaching 1%. So close to 1% on the back of the moves we've already seen in FX, we're probably going to go negative by the time this earnings season is over in local currency terms. But based on our analysis, that is primarily impacted by translation.]” ([10:43])

Marina emphasizes that in dollar terms, European earnings are robust, growing at 7.6%. This disparity underscores the importance for investors to consider constant currency or dollar-based metrics when evaluating European growth, as relying solely on local currency figures may present a skewed perspective influenced heavily by FX fluctuations.

5. Conclusion: Navigating the Currency Landscape

Paul Walsh wraps up the episode by acknowledging the complexity of the topics discussed and the immediate impact expected in the forthcoming earnings quarter. He commends Marina and James for elucidating the multifaceted relationship between currency dynamics and market performance.

The episode underscores a pivotal shift in the U.S. Dollar’s dominance and the cascading effects on European markets and corporate financial strategies. As the U.S. Dollar's structural decline continues, European companies and investors must navigate a landscape where FX exposure and hedging strategies play increasingly critical roles in financial performance and market positioning.

Listeners are encouraged to engage with future episodes of Thoughts on the Market for continued insights into the evolving global financial landscape.