The dollar could underperform other haven currencies if a retreat from US artificial intelligence stocks unsettles global markets, Jayati Bharadwaj, a director of foreign exchange strategy, said.
Recent demand for US government bonds does not establish that investors will also seek protection in the dollar during the next shock. The source of the disruption matters.
Speaking on Bloomberg Television’s “Stocks Fall as Oil Rally Keeps a Lid on Treasuries,” published Oct. 23, Bharadwaj said US assets had regained some appeal amid concerns about France.
But the dollar had underperformed the Japanese yen and Swiss franc in recent days. That distinction complicates the question of whether US assets have recovered their traditional role as shelters during market turmoil.
“The answer lies in the nature of the shock,” she said.
Turning to government debt, Bharadwaj linked earlier bond losses to expectations for growth, concerns about inflation and the Federal Reserve’s interest-rate increases.
More recently, investors’ demands for extra compensation for holding government debt had become a larger influence on global bond markets. Those moves were harder to connect to economic data.
The US midterm elections offered no clear assurance that the government would narrow its budget deficit. Politicians continued to spend more while debt rose relative to the size of economies.
Discussions with clients during the previous 10 days had exposed a tension in their investment plans. They wanted exposure to artificial intelligence but increasingly questioned the investment behind the trade.
Those concerns had prompted interest in holdings outside US technology stocks, including investments in other countries. Clients wanted to spread their exposure and protect themselves against losses on US assets.
Tariffs and oil had tested economies around the world. The United States benefited from its relatively closed economy and energy independence, while Asia and Europe had also held up.
Parts of Asia earned export revenue from supplying chips for artificial intelligence. Bharadwaj contrasted those sales with the US trade’s dependence on stock valuations and its uncertain gains in productivity.
Commodity prices remained elevated, leaving investors to consider how currencies would respond if stock valuations fell.
If anxiety spread through global equities from the US artificial intelligence sector, the dollar could behave like a currency that falls when investors retreat from risk.
The yen and Swiss franc could then outperform it. The euro’s prospects depended partly on the outcome of French parliamentary budget discussions.
Large foreign holdings of US equities increased US vulnerability to an artificial intelligence reversal. Investors could bring money home or increase protection against currency losses on their US holdings.
Bharadwaj gave no timetable or numerical target for that possible dollar decline.
