Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 517

A struggling US dollar bodes well for markets outside America

Even as the global economic outlook weakens, powerful tailwinds are forming behind certain areas of the equity markets that previously spent many years in the wilderness.

Chief among them are stocks in markets such as Europe and Japan, which have surged in recent months amid a pronounced decline in the US dollar. This trend is part of a larger broadening of investment opportunities over the past year — in contrast to the prior decade when large-cap US tech stocks dominated market returns.

Declining dollar could boost non-US stocks

At least part of this dynamic has been driven by a significant reversal in the strength of the US dollar. After an 11-year bull run, dollar dominance appears to be on the ropes as the greenback weakens against the euro, the yen and many other currencies. A continuing downward trend would be welcome news for investors in non-US stocks and bonds, where currency translation effects have eroded returns in recent years.

Non-US stocks have rallied in periods of dollar weakness

Sources: Capital Group, J.P. Morgan, MSCI, Refinitiv Datastream, Standard & Poor’s. Relative returns and change in the USD index are measured on a cumulative total return basis in USD. The U.S. dollar index reflects J.P. Morgan’s USD Real Broad Effective Exchange Rate Index, which is re-based to 100 as of 2010. As of May 31, 2023. Past results are not predictive of results in future periods.

Markets outside the US are already showing signs of a currency boost. As the dollar slipped, European stocks generated the strongest returns among developed markets during the fourth quarter of 2022 and the first quarter of 2023. Japanese stocks, too, have staged an impressive rally — with the Tokyo Stock Price Index, commonly known as TOPIX, rising to a 33-year high in mid-May.

Since reaching a peak last October, the dollar has declined about 6%, as measured by the J.P. Morgan USD Real Effective Exchange Rate Index. While that may not seem like much, as my colleague Andrew Cormack points out, currency trends often play out over long periods of time. He says, “The dollar tends to move in big cycles over many years. And I think the strong dollar cycle we saw over the past decade was a bit long in the tooth.”

While the dollar may yet see intermittent periods of strength due to its perceived status as a safe-haven asset, Cormack believes the long-term trajectory is lower. That’s due to several factors, including a soft US economy, a weak housing market and indications that the Federal Reserve may be done raising interest rates for the balance of 2023.

US equities also have done well so far this year, largely thanks to a rebound in Big Tech stocks. Technology has been the best performing sector so far this year in the S&P 500 Index, driven in part by investor enthusiasm for the rise of artificial intelligence (AI) systems, such as ChatGPT. Earlier this year, ChatGPT, co-owned by Microsoft and Open AI, became the fastest growing consumer app in history.

The difference now is that tech stocks are no longer the only game in town. Other areas of the market are also enjoying time in the spotlight, suggesting the future of growth investing may be more inclusive.

Dividend stocks rise in importance

In this environment, dividend-paying stocks may take on greater prominence, especially if global economic growth continues to slow and market volatility returns. This is also an area where international markets have had an advantage given the higher number of dividend-paying companies headquartered outside the United States and the emphasis they place on returning cash to shareholders.

For example, French drug maker Sanofi has increased its dividend payout for 28 consecutive years. UK-based consumer goods giant Unilever has done so for 22 straight years. As of 31 May, 2023, more than 600 companies headquartered outside the US offered hefty dividend yields between 3% and 6%. That compares to 130 in the United States.

Across all markets since the start of 2022, dividend contributions to total returns have increased, as have total payments to investors. Global companies distributed more than $2 trillion in dividend payments for the 12 months ended 30 April, 2023, an 8.9% increase from the previous 12.

Caroline Randall, a portfolio manager at Capital Group comments: “I expect dividends will be of greater significance to investors this year and beyond. But in a period of relative instability and rising debt costs, it is essential to focus on the quality of dividend payers.”

The dividend decade is here

Source: FactSet. Data for 2023 to 2025 is based on consensus estimates as of May 31, 2023. CAGR = compound annualized growth rate.

For Caroline, finding quality dividend payers means closely scrutinising company balance sheets, credit ratings and interest costs. This has guided her to select companies across the pharmaceutical and medical device industries, utilities, energy producers and some industrials.

“It is critical to track what management says about dividends and equally critical to follow what they do. If you are going to rely more on dividends, you must be confident the companies will pay them. That’s where we can add value as active managers.”

Bullish signal: A mountain of cash on the sidelines

Given these and other opportunities, now may be the time for investors to consider moving out of cash. In recent months, investors have shifted assets from stock and bond investments and driven money market totals to a record $5.39 trillion, as of 26 May, 2023.

This flight to cash and cash alternatives such as money market funds and short-term Treasuries is understandable following last year’s tandem decline of stocks and bonds in the face of rising interest rates, inflation and slowing economic growth. Many investors moved deposits from banks to money markets amid ongoing volatility and relatively high yields on cash alternatives.

Investors’ flight to cash has been followed by strong returns

Sources: Capital Group, Bloomberg Index Services Ltd., Investment Company Institute (ICI), Standard & Poor’s. As of May 26, 2023. Past results are not predictive of results in future periods.

But conditions have shifted thus far in 2023, and long-term investors may want to rethink their approach. Levels of cash alternatives peaked near two recent market troughs. During the global financial crisis, for example, money market fund assets peaked two months before the S&P 500 Index reached a bottom on 9 March, 2009. The stock market recorded a 40% return over the subsequent three months and a 55% return over the following six months.

Similarly, during the pandemic, money market fund levels reached a high weeks after the S&P 500 hit its trough in March 2020.

After the painful losses of 2022, more risk averse investors might consider allocating some cash to dividend-paying stocks, which can provide income and capital appreciation potential, as well as select short- and intermediate-term bonds, which have been offering higher yields than in 2022. 

Looking out across the investment landscape, short-term bonds, dividend-paying stocks and non-US stocks stand out for their attractive valuations and historically lower volatility, offering potentially attractive alternatives to cash for cautious investors seeking a re-entry point.

 

Matt Reynolds is an Investment Director for Capital Group Australia, a sponsor of Firstlinks. This article contains general information only and does not consider the circumstances of any investor. Please seek financial advice before acting on any investment as market circumstances can change.

For more articles and papers from Capital Group, click here.

 

RELATED ARTICLES

Reshoring supply chains: What does it mean for investors?

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.