The U.S. dollar has retreated for four straight weeks—a rare run in the post-pandemic era. This dollar weakness rotation has triggered a shift in global asset flows, steering capital from pricey U.S. growth names toward European cyclicals. The effect is clear: the MSCI World Index just logged its first four-week winning streak since late 2023, closing 3.6 % higher in that span. Below, we unpack the drivers behind this rotation, the sectors enjoying the tailwind, and the potential durability of the trend.
Why the Dollar Slid
The dollar’s pullback began in mid-April after a string of softer U.S. inflation prints and dovish remarks from several Federal Reserve governors. Traders who once priced in only one 25-basis-point cut for 2025 now expect two cuts by December. As two-year Treasury yields decreased due to lower policy-rate expectations, it triggered a rotation caused by dollar weakness across international financial markets. Lower yields narrowed the yield gap with European and Japanese bonds, and as spreads compressed, the greenback lost 2.8 % on the DXY index.
At the same time, the eurozone surprised to the upside. Germany’s May composite PMI rose above 52, the first expansionary reading in ten months. Meanwhile, French industrial production beat forecasts, and the European Central Bank signaled it could trim rates as early as July—yet stressed that policy easing would be gradual. Together, these data points boosted the euro, sterling, and Swiss franc, reinforcing the dollar weakness rotation into non-U.S. assets.
How Capital Flows Responded
Mutual-fund and ETF flows turned abruptly. During the past four weeks, European-equity ETFs recorded net inflows of $6.4 billion, their strongest haul since 2021. U.S. large-cap growth funds, by contrast, saw $3.1 billion in outflows. Global multi-asset portfolios trimmed overweight positions in U.S. tech and reallocated investments as a result of the rotation from dollar weakness toward undervalued European industrials, luxury manufacturers, and financials.
Currency-hedged strategies played a role as well. Hedging cost falls when the dollar loses ground, so allocators switched from fully hedged European-equity products to unhedged versions, amplifying the positive FX contribution. The MSCI Europe ex-UK index rose 5.2 % in local terms and a striking 8.1 % in dollars over the four-week window.
Sectors Benefiting the Most
Eurozone Industrials: Direct Beneficiaries of the Dollar Weakness Rotation
Cyclical sectors that lagged for years are now the prime winners. European industrials, especially capital-goods makers tied to global capital-expenditure cycles, gained 9 % in dollar terms. Siemens Energy, ABB, and Schneider Electric each advanced double digits, buoyed by stronger order books and attractive valuations compared with U.S. peers like Honeywell.
Luxury and Consumer Discretionary
Luxury houses have long priced goods in euros. A weaker dollar versus the euro typically lifts reported sales when U.S. tourists shop in Paris or Milan. LVMH, Kering, and Richemont all rallied more than 7 % in the latest month—helping the consumer-discretionary slice of the MSCI World add 1.1 percentage points of return on its own amidst the ongoing rotation away from a weakening dollar.
Financials Catch a Bid
European banks benefit from steeper regional yield curves and stronger domestic currencies that enhance reported capital ratios. BNP Paribas, Santander, and UBS collectively tacked on 6 % in dollar terms, trimming the valuation gap to U.S. megabanks. This move bolstered the MSCI World’s financials sector, which had underperformed since the 2023 regional-bank scare in the U.S.
Impact on the MSCI World Index
The MSCI World Index allocates roughly 67 % to the United States. Even a modest rotation due to dollar weakness away from U.S. mega-caps can meaningfully shift index performance when non-U.S. equities rally. Over the past four weeks, U.S. stocks added only 1.8 % in dollar terms, contributing 1.2 percentage points to the MSCI World. Europe and Japan, however, contributed 1.7 points combined—more than reversing their drag earlier this year.
Currency moves magnified the effect. A 2.5 % euro rally translated local-currency gains into healthier dollar returns. Japanese equities added 4 % in yen and 6 % in dollars as the yen firmed from multi-decade lows. These tailwinds explain why the MSCI World scored its first sustained winning streak since 2023, despite lukewarm U.S. equity performance.
Could the Dollar Weakness Rotation Last?
Several drivers suggest the trend may endure through summer:
- Relative Growth Surprise
Early data hint that Europe’s economic trough has passed, while U.S. growth moderates. If eurozone PMIs and retail sales keep improving, investors could keep redirecting funds. - Central-Bank Divergence Narrows
The Fed’s projected cuts reduce the U.S. yield premium. Unless European growth falters badly, rate differentials may stay compressed, preventing a rapid dollar rebound. - Positioning Still Dollar-Long
CFTC data show speculative traders remain net long dollars versus the euro and yen. A continued unwind would add pressure.
Yet risks loom. A re-acceleration in U.S. inflation could revive rate-hike fears and halt the dollar slide. China’s sputtering property sector also weighs on global cyclicals; renewed weakness could hurt European industrials reliant on Chinese demand. Investors should monitor upcoming U.S. CPI prints, Fed minutes, and eurozone PMIs to gauge staying power.
Portfolio Considerations
Asset allocators may wish to:
- Revisit Regional Mix: Shift a small portion of U.S. overweight into Europe and Japan to capture currency and valuation upside.
- Hedge Selectively: Keep partial FX hedges to protect against a sudden dollar bounce, particularly if U.S. macro data re-accelerate.
- Add Cyclical Tilt: Consider industrials and financials that benefit directly from stronger local growth and a softer dollar.
- Maintain Quality Bias: Focus on firms with pricing power and balance-sheet strength to endure macro volatility.
Conclusion
The recent dollar weakness rotation reminded markets that currency swings can alter the global-equity leaderboard even when headline growth differentials remain narrow. By boosting demand for European cyclicals and easing hedging costs, a softer dollar helped the MSCI World notch a rare four-week win streak. Whether this marks a regime change or a fleeting adjustment will hinge on the next data releases. For now, investors who diversified beyond U.S. tech enjoyed a welcome revival in international allocations.