[SINGAPORE] The US dollar posted its worst month since 2022 after global investors cut back on US assets, with options markets still flashing warning signals.
A gauge of the greenback is down around 4 per cent in April, the result of a sell-off in both US stocks and Treasuries as US President Donald Trump’s chaotic tariff rollout rocked global markets. Options show sentiment over the next year is the most negative on the US dollar since 2020, creating a strong demand for protection from further losses.
This fallout from the tariff turmoil has got investors questioning whether the US dollar – the world’s reserve currency – is still the safe haven it used to be. That argument was given impetus by the greenback losing further ground this week, even when bank models pointed to end-month buying by companies and asset managers to rebalance their exposure.
“Market action in April looks less like a ‘normal deleveraging’ and more like a quiet exodus of domestic and foreign real money from the US,” said Kevin Thozet, a member of the investment committee at Carmignac.
The mayhem in April has exposed the risks that come with pouring so much money into US dollar assets. The end of the month is when asset managers take stock and adjust holdings based on performance, while exporters manage their exposure, triggering significant flows in the US$7.5 trillion-a-day currency market.
This time around, with US assets underperforming, they were expected to purchase US dollars. Models from Barclays and Credit Agricole had flagged the likelihood of US dollar buying.
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The flows on Monday (Apr 28) – a key day given it can take two days to settle deals – were positive, according to market participants, with one pointing to corporate buying through their bank alone of around US$5 billion.
Even so, the US dollar still fell 0.5 per cent on Monday and is heading for a loss this week, suggesting any end-month buying has been drowned out by sellers. Under typical conditions, such flows might have lifted the greenback. Their limited impact this time suggests a possible shift in market behaviour.
“There could be broader, structural forces at work here that longer-term investors should be aware of – specifically whether we are looking at the end of US exceptionalism or a general ‘de-dollarisation’ theme in markets,” said David Chao, global market strategist at Invesco Asset Management, which oversees more than US$1.8 trillion in assets.
As a first snapshot of the ripple effects from trade policies, the US economy contracted at the start of the year for the first time since 2022 on a monumental pre-tariffs import surge, further undermining US exceptionalism.
“While a lot more is known about tariffs than even a few weeks ago, uncertainty remains very high and we are only beginning to see the impacts of this uncertainty flow through to hard data,” said Nathan Thooft, a senior portfolio manager at Manulife Investment Management.
Up for debate
While many banks have models for how end-month flows might affect currencies, market participants say these have become less reliable since the pandemic.
Demand for US dollars from US companies could still trigger a “snap back” in the currency in the coming weeks, though gauging when and at what level this might happen was “more of an art rather than a science”, said Francesca Fornasari, head of currency solutions at asset manager Insight Investment.
“Usually, when you have had a big move lower in the US dollar, you would have expected that US corporates would come in and actually start to buy some US dollars. Based on the numbers that we look at, that has not really happened,” she said. “You can understand why it has not happened because the move in the US dollar has been so sharp.”
Some analysts warn it’s still early days to judge the outlook for the US dollar on just a few weeks of selling, with concerns about its status emerging every few years and usually being batted away by a resurgence.
“We still lean bearish on the US dollar despite the weakness we have already seen year to date,” said Manulife’s Thooft.
For investors looking for protection against the uncertainty, it’s become more expensive to hedge a continued slide. Interest in how to position on the US dollar from clients surged into the month-end, according to Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore.
“Month-end flows can inflict real pain if you are wrong footed on the currency,” he said. “De-dollarisation is a longer-term trend, and this could potentially provide another bit of information to markets on where it’s headed. How clear it will be though as a longer-term indicator is up for debate.” BLOOMBERG
