The dollar loses its prestige
Since the beginning of the month, the US dollar has lost significant ground against most major currencies. The primary drivers of this decline are political in nature, largely stemming from a flurry of decision-making at the highest levels of the US government.
On the domestic front, the early weeks of the new administration appear to have led to a deterioration in the business climate. Economic agents' confidence has eroded, notably due to repeated reversals on trade tariffs and budgetary cuts imposed on federal operations by Mr. Musk’s Department of Government Efficiency.
Additionally, the US disengagement from international affairs, as advocated by Donald Trump, has also played a role. The European rearmament effort has triggered significant pressure on long-term European interest rates, diminishing the relative yield advantage that once favored the greenback, particularly against the euro and other European currencies such as the Swiss franc.
In the coming weeks, close attention should be paid to the release of US economic indicators to determine whether this episode of weakness is merely transitory or marks the beginning of a more structural trend reversal.
A historic fiscal stimulus in Germany: a turning point for Europe?
For the past two decades, the European economy has stagnated, with Germany facing particularly severe challenges, exacerbated by the surge in energy prices following Russia’s invasion of Ukraine and increasing competition from China. In response to these headwinds, the new German government has unveiled a fiscal stimulus package that far exceeds expectations, a move welcomed by financial markets.
The plan is built on three key pillars. The first involves a substantial increase in defense spending. Additionally, a €500 billion off-budget investment fund (equivalent to 11% of GDP) will be allocated over ten years to infrastructure, while the debt brake for Germany’s federal states (Länder) will be eased. These measures will soon be put to a vote in the parliament (Bundestag), where their approval appears highly likely. The message is clear: Germany is committed to reigniting economic growth.
While fiscal easing had already been anticipated with the new government’s arrival, the stance of the Trump administration regarding Ukraine and Europe’s insufficient defense spending has undoubtedly accelerated this policy shift.
This pivot in Germany could generate momentum across Europe, potentially reversing years of fiscal austerity that have weighed on growth. In this regard, the European Commission has announced an €800 billion plan to strengthen defense, once again demonstrating that Europe finds its resilience and unity in times of crisis.
Until now, the economic outlook for the continent remained bleak, with growth forecasts consistently revised downward. However, this policy shift is expected to stimulate economic activity and prompt upward revisions to growth expectations.
European markets have started the year with strong momentum, led by Germany, which posted a 1% gain. However, this rebound is likely driven less by improving fundamentals and more by excessive investor pessimism combined with a challenging start to the year for US equities. Yet, we are now witnessing the early signs of a genuine paradigm shift, one that remains largely underestimated by the markets. While European equity valuations have moved slightly above their historical averages following this rally, the discount relative to US markets remains significant. Furthermore, current corporate earnings growth expectations are low and are likely to be revised higher in light of these pivotal policy announcements.
In the short term, markets appear somewhat overbought. The introduction of trade tariffs, potential legislative hurdles concerning public spending, or an excessive rise in European bond yields could trigger profit-taking. A market consolidation in Europe would not be surprising, yet such a pullback could present an attractive entry point for investors.
This week’s figure: 19
The CNN Greed and Fear index, the sentiment index for US stock markets, has plummeted to an extremely low level of 19, a sharp decline from the 70 recorded just a year ago.
This significant deterioration suggests that the ongoing correction in US equities may soon be approaching its end.
Author
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Christina Carlsten has been an analyst and senior manager on European markets with Piguet Galland since 1997. She began her career at Banque Scandinave in Switzerland with private clients and then moved on to financial analysis and fund management. Within the Bank, she is responsible for the management of thematic certificates and funds invested in European and global equities. She holds a degree in economics from the University of Lund (Sweden).
