35-Year Highs for the Dollar

GMO

Ben Inker

Research

10 Pages

GMO explains why an overvalued U.S. dollar can quietly drag on U.S. equities while boosting markets with cheaper currencies. It argues currency valuation still predicts both currency moves and equity relative returns, which sets up a potential reversal of U.S. equity dominance. The piece highlights Europe and Japan as likely beneficiaries if the dollar mean reverts.

Key Takeaways

Dollar headwind: Expensive currencies tend to pressure local equity returns through weaker competitiveness and earnings.
Cheap currency tailwind: Undervalued currencies can lift equities through stronger earnings and potential currency appreciation.
EM nuance matters: Cheap emerging currencies can help, but policy mistakes can erode the advantage.
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