Deutsche Bank has stated that the dollar's continued status as a safe-haven asset should not be taken for granted during AI-driven market corrections.
George Saravelos, the bank's global head of FX strategy, said in a note to clients on Friday that the risks facing the dollar are "far more complex than the market has priced over the past few weeks." He added that the recent simultaneous weakening of tech stocks and the dollar supports this view.
One reason is the unprecedented scale of foreign investors' holdings of US equities. Saravelos noted that overseas investors are currently effectively providing all the financing for the US current account deficit. However, their position growth has come primarily from valuation gains rather than new buying — Deutsche Bank estimates that of the more than $20 trillion in US stocks held by foreign investors, roughly 90% reflects price appreciation.
Another key factor is the shifting dynamics of equity hedging. Over the past decade, US equities and the dollar have had a negative correlation, making it easy for investors to choose not to hedge currency risk. But when an equity shock originates from the US, this relationship flips to positive, with the dollar and stocks falling in tandem, thereby amplifying foreign investors' equity losses.
Further evidence of the dollar losing its safe-haven attributes is the simultaneous decline in US real yields and stock prices. Saravelos believes this year's rise in interest rates and stock prices is related to strengthened expectations for AI-related capital expenditure. "A simultaneous decline in US real yields and the stock market would be consistent with these expectations being revised lower," he noted.
Saravelos said that while he does not make judgments about the prospects of the AI ecosystem, the changing relationship between risk assets and the dollar deserves more attention. The report stated: "The AI dollar era has arrived."
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