Germany’s leading bank, Deutsche Bank, wrote in its latest note to clients that the US dollar has “lost its exceptionalism.” George Saravelos, the Global Head of FX Research at the German bank, said that the USD’s status as a safe haven is a myth. Saravelos explained the changing dynamics in the currency markets.
“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,” wrote Saravelos.
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US Dollar Turns Riskier Due to AI Expenditure by Tech Titans
Saravelos also noted that the US dollar has become more “risky” due to “AI concentration and cannibalization risks.” He reinforced the recent sell-offs in the software sector, which lost over $1 trillion. This comes after Alphabet, Amazon, Meta, and Microsoft, among others, have collectively invested $700 billion in AI.
The markets are in a different sphere, and a change is occurring beneath their feet. It is still not known whether the capital expenditure on AI will deliver the returns or go bust. The AI bubble and increased spending are also a threat to the US dollar, wrote the Deutsche Bank analyst. He wrote that despite investment coming in from abroad, investors hedged it for safety. “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,” he noted.
“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 wrote. “The less attractive the US dollar as a portfolio hedge, the more incentive there is to reduce dollar exposure,” he summed it up.
