By Naomi Rovnick
LONDON (Reuters) -Investors' conviction that U.S. President Donald Trump's tariffs and debt spree would spark long-term pain for the dollar and U.S. stocks is crumbling, signaling pain ahead for assets across Europe and emerging markets that were boosted by this view.
The dollar is heading for its first monthly gain this year, boosted by robust economic data, fading concern about the outlook for U.S. assets and a growing belief that the Federal Reserve may not cut interest rates again
for some time.
With artificial intelligence euphoria powering U.S. stock markets to consecutive daily peaks and relentless selling of the greenback going into reverse, European equity outperformance has stalled as the euro slides and a blistering gold rally stalls.
"It's one of the biggest positions people have, being negative on the dollar and the U.S.," Pictet Asset Management co-head of multi-asset Shaniel Ramjee said.
He was preparing to raise his dollar exposure from what he described as "practically zero", on expectations that U.S. economic trends and company earnings would start outshining Europe.
A broad dollar revival, he added, might bring 2025's big market trends to a halt.
The so-called "rest of the world trade", where investors have favoured international assets over the U.S., was led by a rush of speculative bets against the U.S. currency that has now slowed, Barclays analysis showed.
COMEBACK
European stocks, which posted their best-ever quarter relative to the U.S. in the three months to March, are now merely keeping pace with Wall Street's S&P 500 as both indices clock an approximately 8.4% year-to-date rise.
As recently as mid-July, conviction that the dollar would weaken was the most crowded trade among global fund managers, Bank of America research showed.
But currency traders who were making short-term bets against the greenback, which this year suffered its worst first-half slump since 1973, are now backing out.
The dollar index is trading at two-month highs and is set for a 3% rise in July, the first monthly increase this year.
The euro, which scored the best six-month run of its 26-year lifetime in the half-year to June, has fallen below $1.15, heading for its largest monthly drop since May 2023..
"We're seeing a rotation into U.S. equities, a rotation in currency markets and a rotation in (market) momentum," Edmond de Rothschild Asset Management multi-asset head Michael Nizard said.
He cited Sunday's framework trade deal between Washington and Brussels as a major reason for the trend, which he did not expect to last until the end of the year, adding that he would buy the euro at around $1.14.
TEMPORARY?
Monica Defend, head of the investment institute at Europe's largest asset manager Amundi, said she was sticking to a long-term view that the dollar was set to decline because of Trump's borrowing plans and consistent attacks on Federal Reserve independence.
But she said she was also prepared to change her view "if growth in the U.S. surprises nicely on the upside," in a persistent trend from here.
Sterling has fallen 1.4% against the greenback this week and an index of emerging market equities has drooped for three days as a stunning year-to-date rally stalls. Gold, the standout trade of 2025, is heading for its first three-week losing streak since November, trading around $3,300 an ounce.
Amundi's Defend expected U.S. tech stocks and AI exuberance to keep Wall Street equities outperforming from here. But she also expected U.S. growth to stall once tariffs started raising consumer prices.
"The U.S. might continue to be exceptional, probably not on the macro (economic) front, but more on the equity market," she said.
Nutshell Asset Management CIO Mark Ellis, whose UK-based fund changes the composition of its portfolios around twice a month, said he was not certain the U.S. market bounce-back could last beyond next week.
For 50 years, August and September have been the S&P’s worst months for returns compared to volatility, he said.
"Around the end of this week is a good time to take risk off and I'll be more defensive going into historical summer volatility and weakness," he said.
Barclays head of European equity strategy Emmanuel Cau, in a July 30 note to clients, issued a different warning.
He noted that trend-following hedge funds called CTAs, whose trades are viewed as a barometer of the dominant market mood, had closed out bets against U.S. Treasuries and cut exposure to European stocks.
A more persistent dollar bounce-back, he said, would be "a key pain trade" for global investors from here.
(Reporting by Naomi Rovnick; Editing by Amanda Cooper and Philippa Fletcher)
