Why Deutsche Bank says the AI dollar is here

Investing.com -- Deutsche Bank told clients in a note Friday that the dollar’s traditional role as a safe haven cannot be taken for granted in an AI-driven market correction, after recent episodes of tech stocks and the dollar selling off together.

George Saravelos, the bank’s global head of FX research, said the U.S. relies on foreign equity inflows to an unprecedented degree. Those inflows currently finance the entire U.S. current account deficit, a rare occurrence that coincides with very high concentration in the equity market.

“We estimate that roughly 90% of the $20+ trillion value of US equities owned by foreigners is attributable to price appreciation rather than underlying buying,” Saravelos wrote.

He also warned about hedging dynamics. For the past decade, the negative correlation between U.S. stocks and the dollar has encouraged foreign investors to hold their U.S. equity exposure unhedged.

However, he noted strong evidence that the correlation flips to positive when the source of an equity shock is U.S.-centric.

“In this world, the USD becomes additive to equity losses and incentivizes hedging shifts to the stock of US assets akin to the price action we saw around Liberation Day,” he said.

Saravelos added that falling U.S. real yields would help validate a pattern of a weaker dollar alongside weaker equities, as this would signal downgraded capex expectations.

“What we do, however, hope to emphasize is that the risks to the dollar are a lot more two-sided than the market has been pricing over the last few weeks,” he said.

Original Article

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