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Not so long ago, the dollar benefited from fears of conflict and served as a stable asset. Now the situation is changing: signs of a truce between the U.S. and Iran have prompted investors to exit protective assets and return to equity markets and higher-yielding currencies, Bloomberg writes.
Banks are already advising clients to play against the dollar. And the market supports them: large investors have increased hedging of currency risks to the maximums for two years, and bets on further growth of the dollar have noticeably decreased.
Why the fall will be long
“We are seeing a clear rotation of capital: money is moving out of defensive assets and back into risk,” said Kathleen Brooks, director of research at XTB. If tensions in the Middle East continue to subside, the dollar could weaken for a long time, she said.
Markets are already wagering on that scenario. Since April 7, the dollar index is down about 1.4%. At the same time, risk-sensitive currencies (including the Australian and New Zealand dollars) have strengthened about 3% against the U.S. currency.
Domestic politics in the US also put additional pressure on the dollar. President Donald Trump threatened to fire Federal Reserve Chairman Jerome Powell if he does not leave the post in a timely manner. Such statements increase investors’ anxiety about the independence of the regulator.
As a result, the dollar loses the status of the main protective asset and again faces the previous problems – first of all, expectations of rate cuts in the US.
