Wall Street Turns Gloomy on the Dollar as Haven Demand Fades

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Wall Street Turns Gloomy on the Dollar as Haven Demand Fades.

stock :: 3hrs ago :: source - bloomberg

By Carter Johnson and Anya Andrianova

(Bloomberg) -- Deutsche Bank AG and Wells Fargo & Co. are among banks declaring the dollar’s war-driven haven rally is likely over as the fragile ceasefire between the US and Iran prompts investors to seek riskier assets.

The banks are arguing it’s time to embrace bets against the greenback, and global investors seem to be doing just that. They’ve boosted dollar hedging ratios to a two-year high, according to State Street Corp. In the options market, meanwhile, confidence in the dollar has faded, with positioning the least bullish in weeks.

The Bloomberg Dollar Spot Index surged in March as the war roiled global markets, drawing investors to the world’s primary reserve currency, traditionally seen as an oasis during times of crisis. The greenback has surrendered most of that advance over the past week, and is almost back where it was before the fighting erupted at the end of February.

The upshot is that with the haven aura fading, investors are once again focusing on the headwinds that drove the dollar down 8% last year — its worst performance since 2017 — including the prospect of Federal Reserve interest-rate cuts.

“There is clear rotation out of safe havens like the dollar back into risky assets,” Kathleen Brooks, research director at broker XTB in London, wrote in an email. “If the US-Iran conflict does come to a resolution soon, I see a longer period of weakness for the dollar ahead.”

The Bloomberg dollar gauge is down about 1.4% since the US and Iran agreed to a truce on April 7. Risk-sensitive currencies, led by those from Scandinavia, New Zealand and Australia, are up roughly 3% versus the greenback in that period, while the S&P 500 Index has recovered to set new record highs this week.

Pakistan is trying to mediate an extension to the truce beyond its official expiry date next week, but the situation remains fraught. The fragility of the truce underscores the peril of getting bearish on the dollar too quickly, especially if a breakdown in talks sparks a fresh rally in oil and pushes out bets on Fed easing.

Blockade Boost

On Thursday, the US currency and oil rose as the Strait of Hormuz, a key route for oil supplies, remained subject to a double blockade. The backdrop of still-elevated crude prices highlights another reason for dollar strength in recent weeks — the view that the US, as an oil exporter, is insulated from energy shocks.

Citigroup Inc. currency analysts on Thursday said the risk-reward favored betting on dollar strength. Persistently high commodity prices will cap gains in risk assets, supporting bond yields and the dollar, they said.

However, the relative easing in tensions has reignited the wariness toward the US currency that’s shaped conversations around it since President Donald Trump took office last year.

At Wells Fargo, strategists recommended buying the Swedish krona versus the dollar. Deutsche Bank advised selling a broad-based measure of the US currency, seeing scope for the euro to eventually eclipse $1.20 for the first time since January, from about $1.18 now. For their part, JPMorgan Chase & Co. strategists said last week that “the dollar appears to be emerging worse-off on a medium-term basis from the conflict,” partly because of high spending on the war.

While options sentiment still favors the dollar on a trade-weighted basis, it has retreated to pre-war levels, as shown by so-called risk reversals. Depository Trust & Clearing Corporation data also show that options flows, which were heavily skewed toward dollar bullishness in the first two weeks of the war, have flipped bearish this month against major peers such as the euro.

Fed Independence

Brooks at XTB lays out some of the challenges for the US currency, beyond expectations for the Fed to eventually cut rates while markets anticipate hikes elsewhere.

She points to potential worries about the Fed’s independence, with Trump’s threat this week to fire Chair Jerome Powell if he doesn’t leave that post “in time,” creating a possible scenario where the president appoints an ally as interim chair while nominee Kevin Warsh awaits confirmation.

“This could lead us back to the dollar debasement theme, which weighed heavily on the dollar last year,” Brooks said.

In the background, there’s also the view among some on Wall Street that Trump would like to see a weaker dollar to support US exports, although the administration has repeatedly avowed the long-standing US “strong dollar” policy.

Bearish Take

Amid the shift in market sentiment, asset managers have added to bearish dollar trades in the first couple of weeks of April, based on a Morgan Stanley model. A Bank of America Corp. survey from April 3 to April 9 — overlapping the start of the ceasefire — shows that the second-highest conviction trade among fund managers this year, behind owning bonds, was to short the dollar.

“Investors view the Iran war as more of a level shift to the dollar path for 2026 than a change in the trend,” BofA strategists including Ralf Preusser and Meghan Swiber wrote in a note this week.

The extent to which international investors strip out the currency risk from their US holdings — by using derivatives to bet against the dollar — is another potential trigger of greenback weakness.

Data from State Street, one of the world’s largest custodian banks, shows they’re piling into that protection, boosting hedging ratios on the US currency to 63% in the wake of the ceasefire announcement.

What’s more, a resolution of the war, by reducing concerns about economies outside the US, may spur investors to buy more international assets.

“The drivers for the diversification trade are there underneath, but they are just overshadowed by other worries right now,” Beata Manthey, head of European equity strategy at Citigroup, said on Bloomberg Television this week.

--With assistance from George Lei and Vassilis Karamanis.

(Updates with options pricing and flows.)

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