The Reigning Dollar Challenged

The macro point

The dollar king is challenged, but it is not yet defeated. It collapses against major currencies, such as the euro and the pound sterling, but remains strong against emerging currencies. The Dollar Index is still 30% above its 2008 low and within the 2015-2023 fluctuation zone. Given the uncertainty regarding U.S. economic and monetary policy (with rumors of Powell being dismissed by Trump), it is likely that the dollar will weaken further. An additional decline of 3 to 7% is conceivable. In the event of a U.S. recession, it could be much more significant, up to 20%. However, a recession is not our central scenario at this stage. For a recession to occur, there would need to be not only a massive drop in consumption and business investment but also financial destabilization. For now, this is not the case. Liquidity is admittedly very low in almost all market compartments, but even in high yield credit, which is a weak point of the system, there are both sellers and buyers.

In parallel, the possibility of a currency war is strengthening. The dollar's decline is becoming a headache for Japan. Tokyo has threatened to intervene directly in the foreign exchange market as the greenback has fallen below the symbolic threshold of 140 yen. Monetary intervention risks sparking discontent from the Trump administration at the worst time. Trade negotiations between Japan and the United States are at a standstill after the Japanese government refused to agree to exchange its 10-year U.S. Treasury bonds for 100-year bonds. This operation was meant to reduce the debt burden for Americans.

The current context, which is deleterious, is obviously favorable to safe havens. The euro benefits, to everyone's surprise, as does the Swiss franc. But gold is the real winner, reaching new historical records almost every week. According to a study published by Goldman Sachs on April 18, institutional investors in Asia remain the main buyers. Since April 8, they account for nearly 90% of purchases, with individuals having only a minor influence on the prices. The market consensus now expects the price of gold to reach $3,700 per ounce by the end of the year. When gold shows such performance, it clearly indicates that investors are afraid. Caution.

Technical point

On the foreign exchange market, the euro continues to rise. Importantly, the historical correlations that often allowed anticipation of exchange rate movements have not been effective for a few weeks. Historically, the correlation between EUR/USD and the spread between two-year sovereign bonds of Germany and the United States is negative. It is now inverted. This is an anomaly. It shows high investor distrust of U.S. assets. Note, however, that it's only Western investors who are divesting from U.S. stocks and Treasury bonds, not those from emerging countries. China's case is separate. There are many rumors about massive sales by Beijing of U.S. Treasury bonds. But these are speculations for now. We'll have to wait until the end of next month for the update of asset reserves held by the Chinese central bank. Obviously, the fact that historical correlations are no longer an indicator complicates the forecasting exercise. In our view, as long as there is no improvement in the trade war, it's likely the euro will continue to rise with a credible target for EUR/USD at 1.17.

Announcements to follow

U.S. statistics are on the agenda this week. March employment shouldn't be the focus for investors. We know that the economic slowdown likely underway in the United States will take several months to materialize in job creation figures. However, American consumer confidence will be closely monitored. It is collapsing due to concerns about inflation. Added to this is the first estimate of the U.S. GDP for Q1. Usually, this is a data point that goes completely unnoticed. This is not the case this time. Analysts expect a contraction in activity that could strengthen the scenario of a recession this year. We do not share this view. We expect instead a marked slowdown in activity compared to Q4 2024, when GDP increased by 2.4%. This is THE statistic to watch closely this week and could cause significant turmoil in exchange rates. The context is also conducive to a rise in volatility due to the Thursday holiday.

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 a basis for or considered an incitement to engage in any investment.