Dollar strength: what does it mean for markets?
Geopolitical tensions have lifted oil prices, sent U.S. stocks slightly lower and driven flows into the safety of the U.S. dollar, which has strengthened versus peers. While a weaker dollar previously supported international equity outperformance, dollar stabilization now suggests that tailwind is fading, underscoring the importance of diversification across regions and asset classes.
3 mins Reading time
Published on 17 March 2026
The conflict in the Middle East has seen oil prices rise, equities fall slightly, and investors flock to safe haven assets. In times of turmoil, investors often seek the stability of the U.S. dollar (USD) because of its reserve currency status and liquidity, as well as the perceived credit strength of the U.S. This episode of geopolitical uncertainty is proving to be no different with the USD gaining strength relative to global peers.
Historically, the performance gap between U.S. equities and the rest of the world has hinged on the relative strength of the USD. While a weaker USD makes U.S. exports more competitive, this has often coincided with the outperformance of major non-U.S. indices on a relative basis. That pattern has been evident over the last year, with international equity benchmarks outperforming the S&P 500.
In our view, signs of USD stabilization suggest the tailwind from dollar weakness to non‑U.S. outperformance has likely peaked. The USD is near its highest level since May 2025, and the combination of sticky inflation, U.S. energy independence and resilient growth could limit further dollar softness and challenge the recent leadership of international markets. Diversifying across geographies and asset classes remains prudent to capture potential upside amid today’s varied global conditions.
902639 Exp : 17 March 2027
YOU MIGHT ALSO LIKE
Higher inflation has been a dominant theme of the current decade. In addition to price shocks, it is being shaped by secular investment trends in infrastructure, defense spending, onshoring and the ongoing AI buildout. These structural changes reinforce the case for looking beyond traditional 60/40 portfolios to include real assets as a source of diversification and return potential in portfolios.
Inflation appears to have transitioned from its pre-Covid average of 2% to a stickier point closer to 3%, and we do not expect a near-term return to prior levels. In this environment, we believe real assets, such as commodities, infrastructure and REITs, can provide inflation protection, diversification and return potential.
As the S&P 500 approaches all-time highs, there are renewed concerns among investors about elevated valuations. However, historically strong profitability and expected earnings growth appear to support current pricing. In addition, the current S&P 500 price-to-earnings (P/E) ratio is roughly equal to the average since Covid. As a result, we do not view U.S. equities as being in bubble territory and we remain constructive on the asset class.
Stocks, as measured by the S&P 500, are up over 13% through early August. The solid gains have been fueled by a resilient economy, steady consumer spending, optimism around artificial intelligence and better-than-expected earnings growth. Still, some investors worry the advance may be too concentrated in technology and that AI-capex monetization may fall short of expectations. A closer look suggests that it is not just tech moving the market higher.
