BNY said US dollar moves are shaping Q2 diversification choices, as the Rest of World (ROW) equity index has shown a strong correlation with the USD index over the past year. It said markets outside the US have recovered to pre-war levels, alongside the USD, during a risk rally and renewed USD selling.<\/p>\n
Since \u201cliberation day\u201d, the S&P 500 rose 26% and the ROW top 20 companies rose 13%. It also noted a sharp divergence in trends between the S&P 500 and the ROW index.<\/p>\n
BNY said central bank policy is affecting currencies, with European Central Bank expectations of two 25bp hikes in 2026 priced in. It said the Fed has a 40% chance of one cut, and this gap moved EUR from 1.15 to 1.18 this week.<\/p>\n
It said emerging markets are facing a feedback loop linked to USD moves and central bank intervention risk. It added that further intervention could keep front-end rates tighter across global markets.<\/p>\n
The article was produced using an AI tool and reviewed by an editor.<\/p>\n
The path of the U.S. dollar is the most important factor for our diversification choices this quarter, as its direction will likely determine whether international or domestic stocks lead. We’ve seen US stocks outperform the Rest of World (ROW) index significantly since the market rally began. This relationship is clear, as the ROW index has shown a strong inverse correlation to the dollar index over the last year.<\/p>\n
This divergence is being driven by central bank policy expectations. The market is now pricing in two 25 basis point hikes from the European Central Bank in 2026, while the odds of a Federal Reserve rate cut have fallen to around 30% following last week’s slightly higher-than-expected US inflation report. This policy split has pushed the EUR\/USD pair from 1.15 towards 1.18.<\/p>\n
For derivative traders, this means options on the U.S. Dollar Index (DXY), currently hovering around 105.5, could be a direct way to position for a move. A weaker dollar would likely benefit international equity ETFs, making calls on those instruments attractive. Conversely, a stronger dollar would favor continued US outperformance.<\/p>\n
We should also consider options strategies that play on the gap between the S&P 500 and ROW indices. As we move deeper into the Q2 earnings season, CEO guidance on managing supply shocks and protecting margins will be crucial for market direction. Any sign of weakening US corporate outlooks could accelerate a rotation into international markets.<\/p>\n
Emerging markets present a more complex picture due to the risk of central bank interventions to support their currencies. This keeps their local interest rates tight, creating a headwind for equities. Historically, we have seen that a strong dollar, like the one we observed for much of 2025, tends to weigh heavily on emerging market ETFs.<\/p>\n
Create your live VT Markets account<\/a>\u00a0and\u00a0start trading<\/a>\u00a0now. <\/b><\/p>\n","protected":false},"excerpt":{"rendered":" BNY says USD moves drive Q2 diversification; ROW equities track dollar, while central-bank policy shifts currencies.<\/p>\n","protected":false},"author":38,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[46],"tags":[],"class_list":["post-45235","post","type-post","status-publish","format-standard","hentry","category-live-updates"],"acf":[],"aioseo_notices":[],"featured_image_src":null,"featured_image_src_square":null,"author_info":{"display_name":"josephine","author_link":"https:\/\/www.vtmarketsglobal.com\/en\/author\/josephine\/"},"_links":{"self":[{"href":"https:\/\/www.vtmarketsglobal.com\/en\/wp-json\/wp\/v2\/posts\/45235","targetHints":{"allow":["GET","POST","PUT","PATCH","DELETE"]}}],"collection":[{"href":"https:\/\/www.vtmarketsglobal.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.vtmarketsglobal.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.vtmarketsglobal.com\/en\/wp-json\/wp\/v2\/users\/38"}],"replies":[{"embeddable":true,"href":"https:\/\/www.vtmarketsglobal.com\/en\/wp-json\/wp\/v2\/comments?post=45235"}],"version-history":[{"count":0,"href":"https:\/\/www.vtmarketsglobal.com\/en\/wp-json\/wp\/v2\/posts\/45235\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.vtmarketsglobal.com\/en\/wp-json\/wp\/v2\/media?parent=45235"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.vtmarketsglobal.com\/en\/wp-json\/wp\/v2\/categories?post=45235"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.vtmarketsglobal.com\/en\/wp-json\/wp\/v2\/tags?post=45235"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}