Weekly market commentary

We pushed back against calls for the U.S. dollar’s demise last year, arguing its safe-haven role remained intact. Recent market moves have supported that view. The U.S. dollar index is at a one-year high after the Federal Reserve stoked expectations for a rate hike this month. The question is no longer whether the dollar can hold its ground, but what dollar strength means for risk assets, particularly emerging markets (EM). We see selectivity as key in EM.

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Dollar’s rate boost
U.S. dollar index vs. trade-weighted two-year yield differentials, 2023-2026

Two factors have driven the dollar's recent rebound. First, markets have increased expectations for a U.S. interest rate hike this year, widening interest rate differentials in the dollar's favor. Second, stable perceived risk around U.S. assets, together with strong U.S. equity performance and portfolio flows, has supported demand for the dollar. See the chart. After falling sharply following President Donald Trump's tariff announcements in April 2025, the U.S. dollar index has recovered more than half of that decline, challenging the narrative that it had entered a new era of sustained dollar weakness. Much of the rally has come as markets reassessed the outlook for Federal Reserve policy. Yet we think some of the hawkish repricing in rate expectations may be overdone. Our analysis suggests current dollar levels are broadly in line with underlying fundamentals, making a sustained appreciation cycle less likely.

The Federal Reserve remains central to the dollar’s near-term outlook. Markets viewed Chair Warsh's first meeting as a hawkish surprise, even after months of repricing toward a higher-for-longer policy path. Yet we think the meeting was less about signaling a more restrictive course than preserving optionality as policymakers reassess the outlook. That means current rate projections should be viewed as a snapshot rather than a commitment. That supports a stable dollar backdrop.

A stable dollar environment

A stable dollar does not preclude opportunities in emerging markets. Instead, it leaves greater scope for country-specific fundamentals to differentiate returns. EM assets have performed well even without the dollar weakness that has typically accompanied periods of EM outperformance. The dollar still matters, particularly for economies with large external financing needs, but domestic factors and structural opportunities are becoming increasingly important.

Selectivity, rather than broad EM exposure, is key for investors. Structural investment themes that we have been highlighting — including artificial intelligence, infrastructure investment, energy security and rewiring supply chains - are creating opportunities that extend well beyond the U.S. At the same time, differences in energy dependence, commodity exposure and policy credibility mean some economies are better positioned than others to benefit. The improving earnings outlook reinforces that view. Consensus now expects headline earnings per share for the MSCI Emerging Markets Index to grow by more than 50% this year versus 2025, compared with expectations for an increase of 18% at the start of the year. Within our EM equity overweight, we see opportunities in Latin America, where AI-fueled demand for critical minerals like copper and lithium should benefit the region’s commodity and energy exporters. Fixed income also offers selective opportunities. Many central banks have completed their tightening cycles, yet local rates remain elevated in several markets, creating attractive income potential across parts of the EM debt market. In our view, a stable dollar backdrop reinforces the case for active country and sector selection over broad currency calls.

Our bottom line

The dollar’s safe-haven role remains intact, but EM performance increasingly depends on local fundamentals and selectivity rather than the direction of the dollar alone.

Market backdrop

Chip stocks and memory makers led a global selloff in tech shares last week. The Philadelphia semiconductor index slid 8% on the week but is still up nearly 90% this year. The Nasdaq Composite shed 5%, while the S&P 500 lost 2%. We think AI-linked companies lifting guidance on revenue and profit margins show the AI buildout is rolling on. Oil hit pre-Middle East conflict lows, with Brent crude falling to $72 as Strait of Hormuz flows picked up. U.S. 10-year yields fell to 4.37%.

The June payrolls report will be this week’s key market event in a shortened U.S. trading week ahead of the July 4 holiday. Following a hawkish market reaction to the Federal Reserve’s last meeting, investors will watch the report closely for clues about the economy’s underlying strength and whether conditions could still support an interest rate hike this year.

Read our past weekly market commentaries here.

Big calls

Our highest conviction views on six- to 12-month (tactical) and over five-year (strategic) horizons, June 2026

Tactical granular views table

Six- to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, June 2026

We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility.

Granular views

Six- to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, June 2026

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, June 2026

We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility.