Tariffs risk the “potential loss of the dollar’s safe haven status”, Deutsche Bank has warned.
In a note, George Saravelos, global head of FX research at the bank, pointed to several developments since the start of the year that provided “tentative signs” that the dollar was losing its coveted status.
He highlighted, in particular, a declining historical correlation between the dollar and risk assets as well as the growing US current account deficit, which has typically marked the limits of dollar “overvaluation”, according to Deutsche Bank.
“We do not write this lightly. But the speed and scale of global shifts is so rapid that this needs to be acknowledged as a possibility,” Saravelos said.
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Anybody know what that means?
And this is interesting. Does it mean they think spending on defense will enable some European economic growth?
“It comes as the European Union’s efforts to rapidly step up defense spending — in the wake of Trump’s pullback of American security — caused Deutsche Bank to drop its longstanding negative outlook on the euro last week.”
DB2
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Guess:
Declining magnitude of historical positive correlation between USD strength and risky asset valuations. Implication is US-focused trade war lessens demand for USD, USD then weakens, then with such weakness USD reserve currency status weakens.
That’s my interpretation, not saying I believe in the strength of that chain of effects.
And people say we don’t (try to) help each other.
And people say we don’t talk macro, don’t talk investing.
Not here on team fool, we learn or unlearn together.
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I was wondering about that; yet it seems a weak correlation. For example, in the first two years of DXY (the dollar index) the US stock market rose over 25% (1986-87) and yet the dollar index dropped some 25%.
There are too many other factors involved, such as a ‘flight to safety’ or relative interest rates.
DB2
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I would agree with this, all of the other factors/variables that can arise. Pandemic anyone?
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Terrific and important thread, as at the nexus of our METARic core analyses we start with the value and prospects of the dollar as the crux of monetary exchange, interest rates, and the costs of capital necessary for growth in the USA and worldwide.
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After a little reading, it seems there is a low-to-moderate inverse correlation between currency and equities (S&P500) – a correlation coefficient of -0.39. This would yield an r-squared value of 0.15, thus ‘explaining’ 15% of the moves.
The loose correlation is apparent in this graph covering 20 weeks in 2022. The DXY is inverted to make the visuals easier.
Thus it would seem that if you know which way the dollar is going you would have a partial indication of equity direction. Personally, I find currency moves more mysterious than equities.
An interesting sidelight with investing implications: emerging markets are more sensitive to DXY moves than developed markets. A dollar beta effect.
https://academic.oup.com/ooec/article/doi/10.1093/ooec/odac003/6562364
DB2
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Makes sense. I think you were on target with the flight-to-safety comment, up thread.