USD: Safe haven flows hold into FOMC – BNY
|BNY’s Head of Markets Macro Strategy Bob Savage notes the Dollar is entering the FOMC decision on solid footing, with earlier February Dollar hedging sales now fully reversed. He highlights that Middle East conflict dynamics and shifting Fed expectations away from cuts could further improve USD flow averages. USD cash and short-term instruments have seen largely positive flows, reflecting both growth and safe-haven demand.
Flows, conflict and Fed expectations
"The dollar is heading into the FOMC decision on solid ground. The conflict in the Middle East has fundamentally changed the dynamics of FX flows, and we note that the February round of net dollar sales (known as the dollar hedging trade) has been fully reversed. "
"The flows from end-January are still weighing on flow averages, but if the conflict progresses to the extent that there are even larger adjustments in Fed expectations away from cuts, further improvement in flow averages is possible."
"Elsewhere, flow in USD cash and short-term instruments (CAST) has largely stayed positive over the past two weeks, although the bulk of the flow was realized during January and February. This should not be considered adverse for USD’s liquidity preference, as the risk environment was different and the dollar can benefit from both sides."
"Originally, the prospect of U.S. markets continuing to outperform had helped maintain high levels of CAST flows. More recently, USD has been the primary safe haven, as is often the case in geopolitically driven risk-off sentiment. The energy-based nature of risk aversion actually benefits the U.S. due to its net energy-exporting status. This has helped ensure flows are maintained, though the repricing of rate expectations globally may have limited incremental USD CAST."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)
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