FX will be pivotal in 2025

Interviewed recently on Bloomberg Radio Paul Sweeney and Jess Menton, London Business School's Dr Vania Stavrakeva said that foreign exchanges will be pivotal in 2025, influencing global equity valuations and the impact of US tariffs on the global economy.

In sum, Dr Stavrakeva made the following points:

Decoupling Trends: The traditional "risk on/risk off" cycle is shifting. Typically, US stock markets correlate positively with global markets, and the USD depreciates in risk-on periods. In 2024, however, the US stock market appreciated much more than non US stock markets and the USD appreciated, breaking this pattern.

USD Outlook: USD strength is projected to continue due to higher expected US interest rates, driven by inflationary pressures from tariffs and stronger US growth, particularly compared to Europe.

Impact on Non-US Firms:

Positive Side: USD appreciation may mitigate profit losses for non-US firms given the vast majority of traded goods are priced in USD. For instance, when input goods are locally priced, USD appreciation can offset the impact of US tariffs as firms' revenue from exports, translated in local currency, will increase. However, profits will still decline overall due to the tariff burden, with varying effects across non US firms depending on reliance on imported input goods and currency indexing of imported input goods.

Negative Side: Expected USD appreciation reduces the appeal of non-US equities for USD-based investors, while making US equities more attractive to foreign investors. This could sustain USD strength and US market performance, keeping global equity valuations low. (Expectations of a stronger USD can even lead to a self fulfilling cycle)

Broader Trends: Deviations from typical "risk on" patterns are likely to persist, with US equities outpacing global growth and the USD continuing to strengthen despite high US valuations.

You can watch he full interview here: https://lnkd.in/esvCrut2