Credit Agricole’s Perspective on the USD’s Future

Credit Agricole has noted a perceived “return of the frown” concerning the relationship between the USD and the performance of US equities and fixed income. They argue that, while there are some weaknesses in the short-term outlook for the dollar, there’s no need to fear a serious crisis. The ongoing global demand for US Treasury securities contributes to a more hopeful view of the dollar, which contrasts with the instability seen in the UK recently.

Key Points:

• USD Selling amid Risk Aversion:
  Investors seem to be offloading USD as the US stock market experiences weakness. Concerns are growing about potential capital outflows and some vulnerabilities in US bonds, especially in light of Moody’s recent downgrade.

• Political and Policy Concerns:
  There are discussions around stumbling fiscal stimulus plans. The explanation from the Federal Reserve regarding stagflation risks adds to worries about the broader economic environment and intensifies the risk sentiment around the dollar.

• Absence of a “Truss Moment”:
  Credit Agricole does not foresee any chaotic sales in the US akin to what happened during Liz Truss’ tenure in the UK. They suggest that long-term yields could remain stable, particularly since the USD and UST are still seen as global reserves.

• USD Structure Lacks Support:
  Despite recent fluctuations, there appears to be a revival in global demand for USD-denominated assets. This interest may help cap any potential downside for the dollar, especially relative to currencies from weaker or low-yield economies.

Conclusion:

While the USD faces some pressures and anxieties within the bond market, Credit Agricole interprets the situation as one requiring tactical adjustments rather than indicative of structural changes. They assert that the market is not currently pricing in a crisis similar to what the UK encountered in 2022, suggesting that the dollar’s reserve status will help cushion significant downturns.