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A declining U.S. dollar could reshape global markets, with Jefferies analysts noting that investor focus has shifted from "if" to "when" the dollar continues to weaken. The dollar has fallen 8% since January, and Jefferies believes this trend is driven by structural factors unlikely to reverse soon.
The analysts outline two scenarios: a controlled depreciation or a more volatile devaluation that could strain global growth. Either way, European equities are poised to benefit. Jefferies highlights Airlines, Banks, Consumer Goods, Mining, and Infrastructure as sectors best positioned in a weaker dollar environment.
Key factors behind the dollar’s decline include the Trump administration’s push to reduce the U.S. trade deficit and growing doubts over the dollar’s long-term status as the global reserve currency. From an investment perspective, Jefferies believes the U.S. has peaked in its share of the MSCI World Index, while Europe’s growth outlook is improving due to fiscal expansion, deeper capital market integration, and rising competitiveness.
Large-cap, liquid European stocks now offer compelling value, according to the firm. Jefferies adjusted its Franchise Picks to reflect the shifting FX dynamics, adding AB InBev for its exposure to emerging markets and dollar-reported earnings, while removing ASM International due to concerns over cyclical weakness.
If trade policies remain stable and central banks act to soften volatility, sectors like food, retail, and steel could see gains. However, if protectionist policies and tariffs escalate, Jefferies warns of heightened risks.
Despite potential headwinds, the firm remains optimistic, citing commodities as structurally strong and noting that many European sectors now benefit from resilient local supply chains and reduced sensitivity to dollar-based costs. Investors are urged to consider the evolving FX environment when evaluating portfolio exposure.
