A Weaker Dollar Further Supports The ‘Run It Hotter’ Equity Bull Case

2025 was the year of ‘run it hot’ when it comes to the US economy; 2026 looks like it’ll be the year of ‘run it even hotter’, if the Trump Admin’s early policy pronouncements are anything to go by.

Fiscal & Monetary Backdrops To Loosen

First things first, there’s the fiscal loosening that will stem from policies passed in last year’s One Big Beautiful Bill Act (OBBBA), such as tax refunds and R&D expensing, which will create a powerful fiscal impulse, and a considerably more expansionary fiscal stance this year. This, before considering any other potential measures, such as potential tariff rebates, that those in the White House may consider to further juice the economy into November’s midterms.

Then, on the monetary side of things, we have not only the lagged effects of the 75bp of easing that the Fed delivered last year continuing to make their way through the economy, but also a monetary backdrop that will loosen further as the year progresses. The FOMC will likely deliver another 50-75bp of easing this year, to return the fed funds rate to a neutral level around 3%, with risks to that base case tilting in a dovish direction considering not only relatively benign inflationary pressures, but also the still-fragile nature of the labour market.

Balance Sheets Point In The Same Direction

The Fed’s balance sheet must also be considered, particularly considering that asset holdings have now bottomed out at around 20% of GDP – just about a neutral level – and that ongoing ‘reserve management purchases’ will see the balance sheet continuing to expand over coming months. Though this is most certainly not QE, as the purchases are technical in nature and not the FOMC seeking to provide stimulus, an expanding balance sheet will regardless further ease financial conditions.

MBS purchases from the GSEs (Fannie Mae & Freddie Mac), will to a degree have a similar effect. Again, this is not a form of ‘government-sponsored QE’, but the purchases will regardless have the impact of lowering mortgage rates, and thus further easing overall conditions. Here, we should also bear in mind that the current $200bln purchase envelope (enough to absorb a year’s worth of net supply) could, and probably will, be expanded as and when the GSEs IPO later in the year.

Now, A Weaker Dollar Adds Another Tailwind

On top of all that, we now have the FX channel too. The buck has taken a battering in recent weeks, with Trump seeming not only content with the move (‘dollar is doing great’), but also happy for it to continue (‘the dollar is seeking its own level, which is fair’). Chuck into the mix Trump’s long-running preference for a weaker currency, Treasury Sec. Bessent’s desire for trading partners to strengthen their currencies, and that incredibly unusual Treasury rate check in USD/JPY last week, and it’s pretty obvious that we’re moving to a world where the ‘strong dollar’ policy is becoming a ‘less strong dollar’ one.

Personnel Shifts Must Be Considered Too

Speaking of Bessent, personnel is the final piece of this whole puzzle. We’ve had a ‘markets guy’ at the helm of the Treasury for a year now, and if betting markets are correct it looks likely we will also have a ‘markets guy’ as Fed Chair, in the form of BlackRock’s Rick Rieder. While some may balk at the idea of throwing out academic models, and replacing it with the instinct and ‘street smart’ that market veterans may bring, it’s undeniable that the majority of market participants would cheer one of their peers running the show with common sense, and giving the textbooks the elbow.

Implications = Risk Positive

Putting all this together brings with it 2 fairly obvious implications.

The first, is that financial conditions are likely to continue to loosen as the year progresses, with that seemingly being the entire aim of such a policy mix, and risks tilting towards things being even looser than expected, considering the presence of both a ‘Trump put’, and a ‘Fed put’. Secondly, in turn, that is a long way away from an environment that screams ‘bearish risk’ – in fact, quite the opposite, it screams ‘bullish risk’ and is about as strong a backstop to tilt the path of least resistance for equities higher as you might wish for.

Oh, and, not forgetting that President Trump’s ultimate success gauge is the Dow, if one needed any further incentive to buy into the equity bull case.