What if the dollar has bottomed?
The dollar, down around 10% from January highs, has recently bounced following U.S. trade agreements with Japan and the EU. Barclays analysts say this move could reflect the early stages of a broader shift, particularly as speculative positioning against the dollar looks stretched and U.S. earnings and macro data remain firm.
The rally in the euro, driven more by capital flows than interest rate differentials, has been a drag on European earnings, especially for exporters.
Barclays' FX strategists expect the euro to weaken gradually, forecasting EUR/USD to fall toward 1.13. That shift would reverse some of the eurozone's year-to-date 'exorbitant benefit' from dollar weakness, which had exacerbated the impact of deteriorating terms of trade due to tariffs.
European stocks have lagged U.S. peers in part due to this FX dynamic. Barclays says the stronger euro has hit corporate earnings harder than tariffs, contributing to a wave of EPS downgrades in export-heavy sectors. But a dollar turnaround may offer some relief, with the potential to put a floor under European earnings estimates.
Medium-term risks remain. Concerns around Federal Reserve independence and potential rate convergence in 2026, especially if German or EU growth surprises to the upside — could limit sustained dollar strength.
Still, Barclays concludes that FX is no longer a one-way bet. If the dollar has in fact bottomed, it would mark a meaningful shift in global equity drivers, the brokerage said.
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