Analysts at Deutsche Bank pointed out that the dollar no longer guarantees protection during stock declines caused by the artificial intelligence sector, due to changes in correlation and inflows of foreign capital.
Deutsche Bank in its recent client note expressed doubts that the dollar can still be considered a reliable defensive instrument during market downturns caused by a correction in the field of artificial intelligence. Previously, technology stocks and the US currency have already declined simultaneously several times, which called into question previous notions of a safe haven.
The bank's global head of currency research, George Saravelos, drew attention to the unprecedented dependence of the US on inflows of non-resident funds into stocks. According to him, this inflow now fully covers the country's current account deficit, which is happening against the backdrop of extremely high capital concentration in the stock market.
The bank estimates that approximately 90 percent of the value of US stocks totaling over 20 trillion dollars held by foreign owners is due to rising quotes rather than actual purchases.
Saravelos also noted changes in hedging strategies. Over the past ten years, the negative correlation between US stocks and the dollar allowed foreign investors to hold positions without protection. Now, however, there are signs that the correlation is becoming positive when the source of the market shock is precisely the US.
In such a situation, the dollar, according to the analyst, may amplify losses from falling stocks and provoke a shift to hedging the entire volume of US assets, as was already observed during the period associated with the so-called Liberation Day.
A decline in real yields could confirm the scenario of simultaneous weakening of the dollar and a decline in the stock market, indicating a decrease in expectations for companies' capital expenditures. At the same time, Saravelos emphasized that the risks to the US currency remain significantly more two-sided than what the market has accounted for in recent weeks.