Deutsche Bank said in a recent client note that the US dollar has “lost its exceptionalism.” According to George Saravelos, the bank’s Global Head of FX Research, the dollar no longer reliably acts as a safe haven.
“It is often taken as fact that the dollar is a safe-haven: it rallies during risk-aversion. A simple chart of the dollar – equity relationship shows this not to be true. The average USD-equity correlation has historically been closer to zero. And over the last year, the dollar has once again de-correlated from the S & P,” Saravelos wrote.
He also called the currency increasingly “risky” because of “AI concentration and cannibalization risks.” Major tech firms have poured roughly $700 billion into AI, and software stocks shed more than $1 trillion in market value.
Foreign investment into the US continued, but investors hedged dollar exposure at unusually high levels. “Foreigners still continued to invest in the US last year, but they hedged their dollar exposure to an extent that I’ve not seen before,” Saravelos added (Ed. note: this hedging reduces the dollar’s portfolio role).
“When the source of negative equity news is in the US, and the rest of the world is doing better, it is entirely possible for the dollar to fall as equities are going down, just like the 2002 dotcom period,” he warned, and he concluded that “the less attractive the US dollar as a portfolio hedge, the more incentive there is to reduce dollar exposure.”
