Deutsche Bank Says Dollar’s Reliance on Foreign Inflows Into US Stocks Adds Long-Term Weakness Pressure
Summary
- Deutsche Bank said the US dollar could face long-term downward pressure as it becomes more dependent on foreign investment flows into the US stock market.
- The bank said a weakening inverse correlation between the dollar and stocks could put downward pressure on the currency if foreign investors increase FX hedging.
- Deutsche Bank said further changes in the correlation between the US stock market and the dollar could affect global institutional investors’ FX hedging strategies and become a long-term factor behind dollar weakness.
Forecast Trend Report by Period
The US dollar may face long-term downward pressure as it becomes more dependent on foreign capital flowing into the US stock market, Deutsche Bank said.
Bloomberg reported on November 10 that Deutsche Bank said in a recent report the dollar’s moves have become increasingly tied to sentiment in the US equity market, weakening its traditional role as a risk hedge. As a result, the currency could come under pressure if overseas investors raise FX hedging on dollar assets to reduce exchange-rate risk.
The dollar has long tended to strengthen when US stocks fall. That allowed foreign investors to offset some equity losses with gains in the currency, leading many to hold US assets without separate FX hedges. But that incentive is fading as the inverse correlation between the dollar and stocks weakens, the bank said.
George Saravelos, Deutsche Bank’s global head of FX research, and other strategists said further shifts in the correlation between the dollar and stocks will be the key factor in determining hedge ratios going forward. If the dollar also weakens when US equities fall, overseas investors may seek to reduce their dollar exposure.
Deutsche Bank surveyed pension funds and life insurers in more than 12 countries on their FX hedging of dollar assets. Sweden, Switzerland and the euro zone still maintain high dollar exposure, while Chile, Canada and the UK have already adjusted their hedging strategies substantially.
Still, high hedging costs and low foreign-exchange market volatility were cited as factors that could limit pressure on the dollar. Because investors would have to absorb additional costs to reduce exchange-rate risk, there is little immediate incentive to sharply increase FX hedging on dollar assets.
Deutsche Bank said further changes in the correlation between US stocks and the dollar could also reshape hedging strategies among global institutional investors. In particular, with the dollar increasingly reliant on funds flowing into the US stock market, greater hedging by overseas investors could become a long-term driver of dollar weakness.
