This article first appeared in Capital, The Edge Malaysia Weekly on October 20, 2025 - October 26, 2025

EMERGING markets usually benefit from US dollar weakness as investors move their funds in search of better yields and higher returns. But despite a softer greenback, funds remain largely invested in the world’s largest economy, kept in place by better-that-expected corporate earnings growth and the allure of the artificial intelligence (AI) theme.

Since mid-May, the US Dollar Index (DXY), which tracks the greenback’s value against a basket of major currencies, has fallen below the 100-point mark, to about the 98-point level, and stayed there. The index could inch further south as the US Federal Reserve, which cut interest rates for the first time this year in September, has signalled more cuts ahead.

Analysts observe that international fund managers have yet to make a major move.

“We aren’t seeing a lot of funds leave the US yet. In fact, the correlation between short-term yield differentials and the US dollar has only really broken up for less than a month in April, following Liberation Day. Since then, EUR/USD for example, has moved in line with the rate differentials again,” says HSBC Global Investment Research chief multi-asset strategist Max Kettner.

He finds it difficult to imagine significant downside for the greenback from here on, given the already dovish market pricing for interest rates, thus potentially constraining the outflow of funds going forward.

OCBC FX strategist Christopher Wong shares a similar view. He notes that the cautious comments by US Fed officials may not be “sufficiently dovish” for the US dollar to break to a fresh year low at this point, especially when cut expectations have more or less been priced in by the market.

The next Federal Open Market Committee (FOMC) meeting will take place on Oct 29.

Wong is expecting another two more rate cuts this year plus one in 2026.

“Over the forecast horizon into 2026, we continue to expect the US dollar to trade moderately softer as the Fed resumes easing while US exceptionalism fades,” he says, adding that the US dollar has room to fall as long as the broader risk-on sentiment stays intact, growth conditions outside the US remains supported and the Fed stays on the easing path.

“But important to note is that the US dollar’s decline is not a linear extrapolation and will likely be a bumpy path, driven by data surprises, market expectations of the Fed cuts and tariff risks,” he cautions.

Wong agrees that the US dollar could turn bearish “at some point”, but said it would require US economic data to come in softer in tandem with the Fed easing interest rates more decisively. Official data has not been released because of the ongoing US government shutdown.

“The momentum for re-allocation out of USD and USD-denominated assets can pick up when the USD decline accelerates, and this may result in a feedback loop for further USD weakness. But for now, that is not the case,” he observes.

Wong says that in the medium term, the unpredictability of US policy as well as rising US debt levels and budget deficit, is likely to underpin the broad and bumpy decline of the US dollar.

For now, the rally on Wall Street indicates that US dollar weakness has had little effect as investors seem content to stay put. And those who have stayed the course have been amply rewarded as reflected by the S&P 500.

The benchmark index has gained about 13% year to date and an even more impressive 90% over the past five years. The percentage keeps increasing as it stretches back over the last 10 years, with dips in the market usually followed by a quick rebound.

Still, a word of caution. It is worth pointing out that the current bull run is the longest cycle recorded, spanning more than 10 years, without a prolonged recession taking place.

HSBC’s Kettner points out that one reason why funds have not reallocated out of USD-denominated assets is because US corporates continue to register strong profit growth. The strength of their profitability keeps funds locked in.

Just last week, major US banks reported earnings and revenue that beat analysts expectations. The six largest banks in the US posted a combined net profit of US$41 billion, 19% higher year on year, in the third quarter.

Such blockbuster earnings have dialled back concerns that the US economy is headed for troubled waters as the banks’ profit growth suggests that consumer spending remains intact.

Of course, a key factor in the street’s strong showing has been the exuberance surrounding artificial intelligence (AI). The theme has largely been a US story, keeping investors fairly invested in US equities from a flow perspective, says Kettner. The share prices of companies like Nvidia Corp, Oracle Corp and Advanced Micro Devices Inc have scaled new heights this year as earnings soared, fuelled further by the AI narrative.

Rather than funds moving by region and country, JP Morgan Asean equity strategist Khoi Vu says fund flows this year have been concentrated on specific themes such as AI, technology and fiscal reforms, which could explain why this part of the world has yet to enjoy a flow reversal. His FX team is bearish on the US dollar, with their forecast that the DXY Index could further weaken to 93.5 points by early 2026.

“The weak US dollar and Fed rate cuts are the key catalysts for us to stay positive on emerging market equities,” he says.

In the same vein, AHAM Capital Asset Management said in an Oct 7 report that it was maintaining its “overweight” stance on Asian equities on account of the US dollar weakness, supported by resilient corporate fundamentals and improving domestic demand across key markets.

Interestingly, AHAM Capital said it was turning positive on Malaysian equities as the market entered the fourth quarter of the year with improving prospects of a rerating. It said institutional flows had provided some stability, but the next leg higher would depend on whether foreign flows return in a more meaningful way.

“Year-to-date outflows are already nearing levels last seen in 2015 and 2020, suggesting that the brunt of selling pressure may be behind us. If global fund allocations begin to rebalance, Malaysia could see a recovery in foreign participation, providing a key catalyst,” it added.

AHAM Capital said domestic fundamentals reinforce the case for Malaysia — its resilient economy, political stability and policy execution have set the country apart from a politically turbulent Asean this year. “Although Malaysia has seen significant outflows comparable to Indonesia, Thailand and the Philippines, its strong macro and policy backdrop suggest current valuations are not fully justified,” it asserted.

The firm continued to favour structural themes such as income, property, utilities and healthcare, which are underpinned by secular growth drivers and steady demand. “Should foreign inflows materialise, the market could see a rerating, positioning Malaysia as one of the more attractive alpha opportunities in Asia,” it said.

Fund flows have not been particularly encouraging this year. For the year to Oct 10, foreign investors were net sellers on the local equity market, totalling RM17.28 billion.

The bond market in September saw the largest monthly outflow in 11 months, totalling RM6.8 billion, compared to RM3 billion in inflows in the previous month. Foreign holdings of Malaysian debt fell to RM287.3 billion in September, lowering the share of total outstanding debt to 12.9%, according to a recent Kenanga Research report.

JP Morgan’s Khoi cites a report by the firm’s head of Malaysia research Yen Voo that says the country continues to rank high on the “investable list” among Asean members, supported by credible policy execution, a steady macro framework and visible project pipelines for infrastructure, data centres and renewable energy. Even so, the firm is “neutral” on Malaysia within Asean, but sees opportunities in selected structural themes where reforms and private investment align.

JP Morgan’s key picks reflect the AI/data centre theme. It expects Gamuda Bhd (KL:GAMUDA) and Tenaga Nasional Bhd (KL:TENAGA) to benefit from the renewable energy-data centre bundling opportunities and resilient data centre demand. It also likes banks such as Malayan Banking Bhd (KL:MAYBANK), Hong Leong Bank Bhd (KL:HLBANK) and AMMB Holdings Bhd (KL:AMBANK), which are expected to outperform going into the year end on steady loan growth, benign asset quality and improving dividend payouts.

Other key picks include 99 Speedmart Retail Holdings Bhd (KL:99SMART) for potential gain from the additional RM2 billion Sumbangan Asas Rahmah (Sara) aid and tailwinds from Visit Malaysia 2026; Frontken Corp Bhd (KL:FRONTKN) for mergers and acquisitions revival efforts as it has several potential targets in the US; and IHH Healthcare Bhd (KL:IHH) for being well positioned to narrow its valuation versus its peers through steady earnings growth.

The prices of precious metals, specifically gold and silver, have continued to soar to record highs.

Gold futures have surged past US$4,000 per ounce and were trading at US$4,346.90 at the time of writing. Notching a new high, silver futures passed the US$50 per ounce mark and were trading at US$52.78 at the time of writing.

Kettner opines that the run-up is largely due to two factors — buying related to trend and systematic strategies as well as central bank diversification. “So we’d argue it does not signal a hidden risk-off sentiment. Rather, it is the result of a structural change,” he says.

OCBC’s Wong concurs that the heightened buying reflects a mix of structural, fundamental and sentiment-driven demand.

“Official sector demand continues, with China buying gold for the 11th consecutive month and surveys indicating that gold reserves will continue to increase. On the macro aspect, softer nominal yields amid the Fed resuming its rate cut cycle typically bodes well for gold,” he says.

“The US government shutdown is another trigger, as the persistent shutdown injects another layer of uncertainty into the near-term growth outlook,” he explains, adding that fears of stagflation in the US as a result of the tariff drama broadening beyond reciprocal to sectoral tariffs also come into play.

Wong says the recent surge in prices underscores gold’s unique role as both a hedge against geopolitical stress and a store of value in times of policy and institutional uncertainty, while silver has mainly benefited from the mix of structural tightness, macro tailwinds, industrial demand and technical breakout momentum.

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