S&P 500’s rise, Dollar’s demise
As of August 13, 2025, the U.S. financial world is telling a split story: a soaring stock market and a weakening dollar. Not really a contradiction, but rather a reflection of the different forces driving each. The S&P 500’s strong performance, up 10% year-to-date, is largely thanks to a handful of powerhouse companies. This week, the “Magnificent Seven” tech giants surpassed their February peak, cementing their role as the engine of this bull run. Their success is rooted in impressive earnings reports, with dividends and share buybacks growing from $250 billion in 2023 to $430 billion this year. This is being driven by the very real AI boom, which is showing up in the numbers. This has made the market incredibly concentrated, with the top 10 stocks now making up 25% of the total U.S. market cap, a concentration not seen since the 1960s.
The recent market dynamic presents a compelling case of a rising S&P 500 in the face of a weakening U.S. dollar. This relationship is largely driven by the global nature of the S&P 500, where a substantial portion of its total revenue, estimated to be between 30% and 40%, is generated from international markets. As the dollar declines against other currencies, the foreign earnings of these multinational corporations are worth more when converted back into dollars, effectively boosting their reported profits. This tailwind for corporate earnings has been a major catalyst for the S&P 500’s performance, particularly benefiting sectors with high international exposure like Information Technology, where foreign revenue can exceed 50%.
Meanwhile, the broader market isn’t quite as ebullient. While the S&P 500’s equal-weighted index is near its all-time high, only half of the index’s components are trading above their 50-day moving average. This suggests that the gains are not evenly distributed. The market’s strength is still primarily an earnings story, with close to 83% of companies reporting so far beating estimates by an average of 800 basis points. This corporate resilience, particularly among the largest players, has been the main driver for equity investors.
The U.S. dollar’s near 10% drop, however, is being shaped by different forces. The bond market is surprisingly calm, with investors now placing a 90% probability on a September interest rate cut. This expectation of looser monetary policy has put downward pressure on the dollar. The forward curve is even anticipating a terminal rate of around 3% next year. This dynamic, where the promise of lower rates supports stocks but weakens the dollar, creates a clear division in how different markets are interpreting the Fed’s intentions.
In essence, the stock market’s ascent is fueled by a combination of spectacular corporate earnings from its biggest companies, a weak dollar, and the expectation of higher growth on fiscal stimulus from the OBB Bill. This is happening even as there are uncertainties about who will ultimately bear the costs of new tariffs. The dollar’s decline, on the other hand, is a direct result of the recent global repricing of U.S. assets in anticipation of lower interest rates.
Euro eyes $1.20—but the Fed holds the key
The euro’s most plausible path to a sustained rally this year hinges less on developments within the eurozone and more on shifts in U.S. monetary policy. EUR/USD has recaptured the $1.17 handle, a fresh 2-week high, but the real catalyst for a move toward $1.20, last reached in 2021, likely resides in Washington, not Frankfurt. Back then, the Fed’s ultra-loose stance suppressed the dollar, creating favorable rate differentials and capital flows that supported the euro. A return to $1.20 would place the pair near its 10-year average of $1.22, suggesting such a move would be well within historical norms.
Investor positioning remains light, and sentiment toward Europe is muted. That leaves room for upside if the U.S.–Europe rate gap narrows further and the dollar weakens, whether due to softer economic data or a clearer pivot by the Fed toward easing. While persistent core inflation could delay rate cuts, signs of labor market fragility and mounting political pressure may eventually force the Fed’s hand.
In contrast, the European Central Bank appears less inclined to cut rates again anytime soon. The eurozone’s growth outlook remains tepid, but expectations are low. Even incremental progress on initiatives like deeper capital market integration or joint debt issuance – part of Christine Lagarde’s broader “global euro” vision – could be enough to sustain interest from reserve managers and long-term investors.
Recent U.S. inflation data reinforced market expectations for more aggressive Fed easing. In that context, the euro doesn’t need a dramatic European recovery to gain ground. A weakening dollar and a narrowing rate differential may be sufficient to propel the single currency higher.
Fed speculation holds CAD
The USD/CAD has been remarkably stable over the past nine trading sessions, holding a tight range between 1.381 and 1.372. This period of relative calm, with the pair trading between its 20-day and 100-day moving averages, is a deceptive indicator of the underlying economic realities in both the United States and Canada. The primary force preventing the Canadian dollar from weakening further is not its own strength, but rather a broad-based softness in the U.S. dollar, which is masking persistent domestic and external pressures on the Loonie. In fact, the CAD is the worst-performer currency against all majors in the last 7 days.
The U.S. dollar’s recent decline is largely fueled by market expectations of a “Fed pivot” in September. Recent benign CPI data and a soft job report for July have shifted sentiment, leading investors to believe the Federal Reserve will adopt a more dovish monetary policy despite concerns around tariff inflation. This prospect of a rate cut has unwound long USD positions across the board, providing a lifeline to the Canadian dollar.
However, the domestic picture in Canada remains challenging. The Bank of Canada (BoC) is navigating a difficult path, with domestic data presenting a complex and often contradictory outlook. The job market shows signs of weakening, with stagnant growth, while inflation remains stubbornly sticky. This combination of weak growth and persistent inflation makes the BoC’s path forward tricky for its remaining three meetings this year, limiting its ability to counter the effects of tariffs in both growth and inflation fronts.
On top of these domestic concerns, Canada is facing renewed external pressures that are weighing on its economic outlook. While the CUSMA deal continues to shield a large portion of trade with the U.S., it has not insulated the Canadian economy from targeted trade actions. A deal with the U.S. to reduce tariff rates on non-CUSMA compliant goods appears unlikely to materialize this year, leaving those sectors vulnerable. Adding to the trade woes, China has escalated tensions by adding new tariffs to Canadian canola exports, a significant blow to Canada’s agricultural sector and its second-largest trading relationship.
The current stability of the USD/CAD relies heavily on a soft U.S. dollar. Without this external support, the Loonie would likely be under significant pressure from the confluence of a weak domestic economy and mounting trade-related challenges. The direction of the pair in the coming months will hinge on whether the narrative of a dovish Fed continues to dominate or if Canada’s underlying economic and trade weaknesses begin to assert themselves more forcefully in the market.
Policy divergence drives GBP higher
The UK economy grew more than expected in Q2, expanding by 0.3% and beating the 0.1% forecast. Meanwhile, industrial production (0.7%) and manufacturing output (0.5%) also exceeded expectations for June, rebounding from contraction in the previous month. These figures contribute to a picture of a resilient economy that has held up despite tax hikes and President Trump’s tariffs.
It’s worth noting that the higher Q1 growth of 0.7% was artificially inflated, as exporters rushed to secure deals ahead of the tariffs – boosting the monthly export figure by 3.3%, compared to 1.6% this quarter. Factory output also performed better than estimated.
This set of numbers, coupled with Tuesday’s data showing fewer job losses than initially reported, reinforces the belief that the Bank of England is in no hurry to cut rates.
The results helped sterling rise 0.1% against the dollar shortly after their release, reaching the July 24th high of 1.3589.
GBP/USD pushed higher yesterday within the 1.35 zone (almost 0.6%), despite a quiet calendar on both the UK and US fronts. Limited resistance between 1.35 and 1.36 supported sterling’s continued rise, driven primarily by the Fed’s dovish tilt and the Bank of England’s recently reinstated hawkish tone. The pair closed above the 50-day moving average for the first time since late July, when momentum had begun to fade. Notably, the 21-day moving average crossed below the 50-day around the same time, and its failure to break back above suggests that while bullish momentum is building, a sustained uptrend has yet to fully materialize.
This morning’s data provides fresh momentum for sterling to challenge the 1.36 resistance level. For that to happen, however, we believe today’s US PPI data may need to lend support, building on the not so hot CPI report earlier this week and, therefore, accentuating that policy divergence with the UK.
The next key zone is 1.37, where the year-to-date high of 1.3789 was reached in early July.
CAD worst-performer against all majors in the last 7 days
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: August 11-15
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.ve a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
