U.S. Dollar's Safe-Haven Status May Not Be So Safe, BofA Says
(Bloomberg) -- Currency traders may not want to put all their trust in the dollar’s status as a haven, especially if the U.S. trade conflict with China calms down.
The greenback is the “dominant” haven when the most pressing risks are associated with China, Bank of America strategists including Adarsh Sinha wrote in a note to clients. A cooling of tensions with China could bring political brinkmanship in Europe and the U.S. into focus, when the yen and Swiss franc would likely offer better risk-reward going into next year, the strategists wrote.
The dollar showed resilience in the face of a “risk-off backdrop for financial markets” in the past year, appreciating as sentiment deteriorated and staying more stable than other haven-like currencies, such as the euro, yen and franc, they wrote.
But U.S. and European political risks could see the dollar and euro lose some stature as havens, the strategists said.
“The fact is the USD is the dominant safe haven only when China concerns are driving risk off, as we have observed over the past few months,” the strategists wrote. “If trade war concerns recede, the focus may shift to political brinkmanship in the U.S. and Europe,” a backdrop in which the dollar typically underperforms the yen and franc.
The Bloomberg Dollar Spot Index fell as much as 0.3 percent Tuesday morning in New York, the biggest slide in nearly a week. Bank of America expects the greenback to continue falling amid higher risk premium associated with twin deficits and U.S. political gridlock, regardless of a generally positive outlook on growth and further Federal Reserve rate hikes in 2019.
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