Focus on the Dollar

The macro point

For now, volatility is reduced in the foreign exchange market and trends on the main pairs should remain unchanged as long as real short rates (taking inflation into account) in the bond market are contained.

On the other hand, the extreme positioning of institutional investors regarding the US dollar is worrying and could destabilize the international monetary system. According to Bank of America's latest monthly survey of global asset managers, they have never sold the dollar as much in 14 years. They are desperately trying to reduce their exposure to the American currency. The reasons include concerns about the independence of the Federal Reserve (Fed) after Jerome Powell's departure in spring, a potential American tech bubble, and also, more surprisingly, the deterioration of the US labor market, particularly for new entrants. This unexpected decline is certainly linked to the electoral cycle and not to artificial intelligence, in our opinion.

So far, the outflow of dollar assets has mainly benefited the euro and emerging currencies, which have shown impressive resilience since the beginning of the year. Some believe that the dollar is oversold and that it can only rebound. This is what usually happens. But it is by no means certain. Markets are rarely rational and as long as concerns about the US economy and stock market persist, dollar sales could continue.

Let's not forget geopolitics, which could come back to the forefront. The Greenland issue is far from over. It could resurface in April or May, once the winter period, not conducive to military intervention on site, is over.

Clearly, the decline of the dollar is still the central theme this year in the currency market, as it was already in 2025.

On a macroeconomic level, the latest figures are not reassuring for China, particularly in terms of consumption, which remains hampered by the collapse of the real estate market. According to official statistics, 70% of Chinese household wealth is tied to real estate (compared to less than 30% in developed countries). Since 2021, prices have been continuously falling. In the country's major cities, the decline is at least 20%.

In some districts of Shenzhen (one of the country's major cities), apartments that sold for 110,000 yuan per square meter now sell for 50,000 yuan. Tens of millions of families watch their savings melt away while continuing to repay mortgage loans on properties that are now worth only a fraction of their debt. In Zhengzhou, the capital of Henan province, 500,000 households are already in default. Banks have given up on seizures because less than 20% of seized properties find buyers.

The situation of the Chinese real estate market is much worse than previously thought. It is the main obstacle to a recovery in growth in China. It is also a fragility factor for the global economy.

Technical point

On the foreign exchange market, the "debasement trade" remains the norm. Institutional investors continue to sell their dollar assets to buy assets denominated in other currencies. In 2025, this greatly benefited the euro. This is a bit less the case at the beginning of this year. Flows are mainly going towards Asia, both developed and emerging Asia. This is likely a long-term movement.

In Europe, pressure remains on the pound sterling. The confirmation of the deterioration of the UK labor market opens the door to a 25 basis point rate cut by the Bank of England in March. This deterioration is officially attributed to the increase in the minimum wage. The rate dynamic differential should favor an upward trend for EUR/GBP in the medium term.

Finally, a slight decline of EUR/JPY (-0.67% over a month). We do not think this indicates a lasting change of direction for the pair. It is most likely profit-taking. The trend is still upward in our view.

Announcements to follow

This beginning of the week should be rather calm. In Asia, exchanges were weak due to the last day of the Chinese New Year festivities.

In Europe, the IFO business climate index should improve slightly in Germany in February. The massive stimulus plan presented by Berlin a year ago is starting to pay off. A first part of the €1000 billion put on the table was disbursed at the end of 2025. We expect Germany to finally emerge from economic stagnation this year with growth at 1.5% (compared to 1.2% for the eurozone and probably 1% for France).

To watch: the American consumer confidence index in February published by the Conference Board. In recent months, household confidence has been in free fall. This is certainly linked to the slowdown in the labor market. For now, this does not call into question the good US macroeconomic momentum, which is supported by massive investments in artificial intelligence. But it is a point of fragility not to be overlooked in the coming months and could encourage the Fed to lower its key rates more than expected.

The information presented in this publication is provided for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not be used as the basis or considered an inducement to engage in any investment.