Deutsche Bank believes that if an AI-driven market rally were to reverse, the dollar's traditional status as a safe-haven asset can no longer be taken for granted.
George Saravelos, Deutsche Bank's global head of foreign exchange strategy, said in a note to clients on Friday that the risks facing the dollar are "far more two-sided than market pricing over the past few weeks has reflected."
The recent simultaneous weakness in tech stocks and the dollar supports this view. One reason is that overseas investors' exposure to U.S. equities has reached unprecedented levels.
Saravelos said that foreign investors currently finance the entire U.S. current account deficit, but the growth in their holdings of U.S. assets has come mainly from valuation gains rather than fresh buying. Deutsche Bank estimates that of the more than $20 trillion in U.S. equities held by foreign investors, roughly 90% reflects valuation gains from rising prices.
Another key factor is the currency hedging mechanism for equity investments. Over the past decade, U.S. stocks and the dollar have been broadly negatively correlated, giving overseas investors a strong incentive not to hedge their dollar exchange-rate risk. But if a stock market shock originates in the United States itself, the relationship would turn positive, and the dollar could fall in tandem with U.S. equities, further amplifying overseas investors' equity losses.
Saravelos said that if U.S. real yields and the stock market were to fall at the same time, it would further confirm that the dollar is losing its safe-haven attributes. He argued that this year's simultaneous rise in both interest rates and stocks is tied to heightened market expectations for AI-related capital expenditure. "If U.S. real yields and equities were to decline together, that would be consistent with a scenario in which these expectations are revised down," he said.
Saravelos said he is not making a judgment on the outlook for the AI ecosystem, but that the changing relationship between risk assets and the dollar deserves more attention. The report said: "The 'AI dollar' has arrived."
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