The Dollar Weakens, but EEMEA Gains as Fiscal Divergence Rewires Global Markets

USD weakness in 2025 has catalyzed positive momentum for the EEMEA region, as market dislocations between macroeconomic fundamentals and asset prices create strategic opportunities for investors. The ongoing shift in global monetary and fiscal policies has led to significant divergences in economic performance across countries, with non-US markets gaining relative traction. BlackRock highlights the importance of these divergences, noting that asset price moves in the first half of 2025 have been heavily influenced by sentiment swings between US and non-US assets. This divergence reflects both country-specific fiscal developments and the uneven pace of monetary policy adjustments globally [1].

One of the central themes shaping the USD’s performance is the rise of expansionary fiscal policy. The implementation of the One Big Beautiful Bill Act (OBBBA) in the US, coupled with the expiration of the Inflation Reduction Act, has spurred a wave of infrastructure and manufacturing investment. These developments have, however, come at the cost of deteriorating budget deficit projections. In contrast, Germany’s unexpected pivot toward deficit spending has generated macroeconomic surprises, influencing bond markets and prompting short positions in German Bunds. Meanwhile, Japan’s sustained exit from deflationary trends has improved its fiscal outlook, leading to long positions in Japanese equities and the Yen [1].

The inflationary environment continues to play a pivotal role in shaping global economic activity. Central banks face mounting challenges as consumer and corporate behavior become increasingly sensitive to price signals. The persistence of inflation is partly attributed to rising electricity costs, which have diverged significantly across countries due to a mix of regulatory, geopolitical, and demand-side factors. BlackRock notes that electricity prices are trending upwards globally, with the US showing signs of converging toward higher international levels. This trend poses a risk of entrenching inflation above central bank targets, particularly in the services sector [1].

Monetary policy adjustments have also been pivotal in shaping the USD’s trajectory. Central banks in Europe, the UK, and the US have all signaled evolving approaches to managing inflation and growth. In Europe, the coordination between the European Central Bank and the European Commission has initiated a re-rating of asset prices, with implications for equity and bond markets. The UK’s handling of quantitative easing (QE) losses and its approach to bond auctions have led to long positions in UK Gilts. In the US, the Federal Open Market Committee (FOMC) appears open to rate easing despite inflation pressures, while discussions around balance sheet normalization suggest a more accommodative stance [1].

For investors, the interplay between fiscal stimulus, inflationary risks, and monetary policy coordination presents a dynamic environment. BlackRock outlines a strategy of capitalizing on dislocations across global markets, with a focus on low-correlation diversification. Tactical shifts in equity, bond, and currency positions reflect an active response to evolving macroeconomic conditions. The firm’s positioning in global fixed income, particularly through the iShares Global Government Bond USD-Hedged Active ETF (GGOV), underscores the potential for gains in a weakening dollar environment [1].

Source: [1] Back to school: Fiscal policy and inflation 101 - BlackRock (https://www.blackrock.com/us/financial-professionals/insights/2h-2025-macro-outlook)