Cross-Asset Quarterly Outlook
June 2025*
Big Beautiful Dollar Depreciation
- The outlook for equities and bonds remains clouded by policy uncertainty and mixed economic data.
- In contrast, the US dollar appears to be in the early stages of a longer-term bear market.
- This quarter’s allocation changes reflect growing conviction in a weaker dollar and shifting capital flows — including a downgrade to US equities and nominal Treasuries.
- We maintain our largest overweight in precious metals, while our key underweight remains US high-yield credit.
Following April’s selloff, global equities have regained momentum and outperformed. However, the three-month trend has favoured global bonds, with rates returning 3.6% and global equities returning 2.5% (see Chart 1). Both equities and bonds face potential risks, complicating cross-asset portfolio construction. Global growth downgrades, trade uncertainty, and rich valuations all point to some vulnerability for stocks. Government bonds offer a relatively attractive yield (the US 10y yield is currently at 4.4%), but the rising term premium has eroded safe-haven appeal of US Treasuries (see Chart 2).
Historically, the start of Fed cutting cycles (which most recently began in September 2024) marked attractive entry points for long duration exposure (see Chart 3). The recent downgrades to US growth (Chart 4) and rise in recession risks historically also boost demand for US government bonds. This time is not necessarily different. The equity market decline in mid-April coincided with a brief drop in US Treasury yields to 4%. Should the recent stock market recovery falter, rate expectations would likely fall again. Still, the steady rise in term premia is an indication that nominal bond yields are unlikely to revisit post-GFC lows, limiting diversification benefits – we target 3.0%-3.5% for the US 10-year yield in a mild-recession scenario and 4.0%-4.5% in our baseline.
Unlike other assets, the US dollar did not retrace to pre-Liberation Day levels. Since early February, the Bloomberg trade-weighted dollar (BBDXY index) has depreciated by 7%. The dollar appears to be entering in a long-term bear market. Cyclical factors are weighing on the dollar, including negative US growth revisions (see Chart 3). In addition, we expect some structural factors to become less supportive for the greenback. The dollar will likely retain its status as the world reserve currency, given a lack of credible alternatives. However, the US Real Broad Effective Exchange Rate (REER) is about 17% above its historical average (see Chart 5), leaving the currency exposed to further mean reversion. Several policies from the current administration (e.g. narrowing the trade deficit) are likely to encourage diversification away from US assets and the repatriation of capital from countries with net international investment surpluses. Financial inflows have been an important tailwind for the world reserve currency (see Chart 6), and this will likely become less supportive if the Trump administration is successful in partially reducing the US current account deficit.
Chart 1: Asset Returns, Mar-May, %
Source: Bloomberg
*The publication reflects asset performance up to May 31, 2025, and macro events and data releases up to June 6, 2025, unless indicated otherwise.
The information contained herein is obtained from sources believed by City of London Investment Management Company Limited to be accurate and reliable. No responsibility can be accepted under any circumstances for errors of fact or omission. Any forward looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.