The recent rebound in the US dollar, driven by resilient economic data, strong corporate earnings, and progress in US trade deals, has prompted Standard Chartered to advise investors to reduce exposure to US assets and consider rotating into more attractively valued Asian equities and emerging market (EM) local currency bonds.
The bank, which had flagged a potential USD short squeeze in its June outlook, now sees the rally as an opportunity to rebalance portfolios. “We would now use the USD rebound to reduce any excessive exposure to US assets and rotate to relatively inexpensive Asia ex-Japan stocks and EM local currency bonds,” the report noted.
USD Rebound Driven by Trade Deals and Hawkish Fed
The US dollar index (DXY) has surged above its 100-day moving average, boosted by recent trade developments and a more hawkish stance by the Federal Reserve. The DXY could rise a further 2% towards its May peak of 102, Standard Chartered said.
This strength was underpinned by the absence of retaliation to US trade agreements with major partners such as the European Union, Japan, and South Korea, as well as strong US macroeconomic and corporate earnings data. However, the bank suggests this rally is a tactical rather than structural opportunity.
“Strong momentum could drive DXY higher in the short term, but easing trade uncertainty and attractive valuations outside the US support a rotation into global equities,” it stated.
Fed in Dilemma Over Inflation and Rate Cuts
The Federal Reserve, after holding interest rates steady for a fifth consecutive meeting, has refrained from committing to a rate cut in September. Two of the 11 policymakers dissented in favour of a cut—the first such double dissent in over three decades. Market expectations for a September cut have dropped from 90% at the start of July to just over 40%.
US tariffs, which are now higher than anticipated—15% baseline on key allies—are expected to drive inflation higher in the short term. According to Yale Budget Lab estimates, average tariffs will rise to 17.5%, potentially pushing consumer prices up by 1.8% and shaving 0.5% off real GDP growth in both 2025 and 2026.
This dynamic puts the Fed in a difficult position, with inflationary pressures potentially delaying rate cuts despite signs of economic cooling.
Asia ex-Japan Equities in Focus
In response to these macro developments, Standard Chartered is overweight on China and South Korea within Asia ex-Japan. The easing of trade tensions and supportive domestic policies make the region attractive for equity investors.
In China, the government’s efforts to curb overcapacity and promote stable earnings growth—particularly in the tech sector—support the market outlook. South Korea, meanwhile, stands to benefit from policy initiatives aimed at boosting shareholder returns and a trade deal with the US that aligns its tariff treatment with that of Japan.
“The region should benefit from easing trade uncertainty and supportive domestic policies,” the report noted.
Bullish on EM Bonds and Short-Duration USD Credit
On the fixed income front, the bank prefers shorter maturities given the potential delay in Fed rate cuts. It recommends focusing on the 5-7 year maturity bucket in USD-denominated bonds.
Standard Chartered also favours short-duration US high-yield corporate bonds, citing resilient fundamentals and limited sensitivity to Fed rate moves.
Meanwhile, the resolution of some trade issues and exemptions for countries like Brazil reduce downside risk for emerging markets. This supports an allocation into EM local currency bonds, especially as their valuations remain compelling.
Standard Chartered’s strategy reflects a pivot away from US-centric assets amid a short-term dollar rally and tariff-induced inflation concerns. With improving clarity on trade and a supportive policy environment in Asia, the bank sees compelling opportunities in China and South Korea equities, alongside selective EM bonds and short-duration US credit.
As global markets navigate geopolitical shifts and central bank uncertainty, diversification beyond US assets remains key to long-term resilience.
