Barclays sees EU equity upside as weaker dollar spurs repatriation flows

Investing.com - The U.S. dollar may be persistently lower in value despite potential support from any de-escalation in tariff tensions, analysts at Barclays (LON:BARC) said, adding that this weakness could bolster European stocks.

In a note to clients, the analysts led by Emmanuel Cau said that they do not see a "strong reason" for the greenback to trade much higher than fair value, which they estimated is at around $1.15 against the euro.

The dollar is trading down by roughly 10% from highs notched in January, as investors fret over the impact of U.S. President Donald Trump’s punishing tariff policies and worries that he may move to sack Federal Reserve Chair Jerome Powell.

But, following comments from Trump on Tuesday, hopes have risen that the White House’s recently adversarial approach to trade negotiations with China may be softening.

Trump told reporters that U.S. levies on the world’s second-largest economy would fall after a deal is secured, although he noted that duties would not decline all the way to zero.

Treasury Secretary Scott Bessent also said that while discussions with Beijing would be a "slog", he believes the two countries can cool down escalating trade tensions.

Meanwhile, Trump appeared to back off from scathing remarks about Powell as well, saying that he has "no intention" of firing the Fed leader.

Heading into the Easter weekend, markets had been fretting that Trump may be preparing to dismiss Powell for not moving fast enough to slash interest rates. Suggestions from a top White House adviser that officials were considering whether to sack Powell rattled investors as well.

Trump seemed to be attempting to mollify these fears, adding that he would only like to Powell "be a little more active in terms of his idea to lower interest rates."

Still, the Barclays analysts said that, even with Trump cooling the rhetoric towards Powell, "dovish pressure" will continue to face the Fed.

"This would likely further erode market confidence in the integrity of the greenback, increasing the risk premium for holding dollars," the strategists wrote.

The ongoing risks posed by Trump’s "erratic governance" has could also weigh on the dollar and make Treasury markets "edgy," they added.

Non-U.S. equities, particularly those in Europe, stand to benefit from this trend, they argued, noting that EU stocks and bonds have outperformed their U.S. counterparts since Trump announced sweeping reciprocal tariffs on April 2.

"Flows dynamics show the unwind of U.S. exceptionalism trade is under way, with European investors beginning to repatriate their assets back into the region," the analysts said.

"If the repatriation were to continue, it could mean upward pressure on the euro and equity outperformance in Europe."