USD: The new high-beta in town – ING

A mad week for markets is ending with heavy losses for the dollar. The FX scorecard is speaking volumes; in G10, only the illiquid Norwegian krone is flat against the dollar since last Friday. The question of a potential dollar confidence crisis has now been definitively answered – we are experiencing one in full force. Yesterday's cross-asset price action demonstrated a radical shift away from US assets, with both equities and Treasuries declining despite a core CPI reading substantially below expectations, ING's FX analyst Francesco Pesole notes.

Markets rotate out of USD safe haven

"Clearly, markets have dismissed March inflation as an outdated figure and remain concerned about the combined threat of inflation and growth deceleration. While the 30-year Treasury auction demonstrated unexpected strength yesterday (mirroring Wednesday's robust 10-year auction), the USD swap spread expanded further (10Y now 56bp), and our rates team maintains a bearish Treasury view. We also cannot exclude that the budget resolution passed by the House yesterday, which poses significant funding questions for tax cut extensions, is adding another layer of risk premium to risk assets and Treasuries."

"The dollar collapse is working as a barometer of 'sell America' at the moment. The rotation to other traditional safe-havens like CHF, the Japanese yen or even the euro is justified by the loss of USD safe-haven appeal. But the USD drop against high-beta currencies (including the China-sensitive AUD and NZD) is a signal that markets are heavily building positioning for a broad-based dollar decline."

"At this stage, picking a bottom in the dollar is as risky as trying to guess Trump’s next move on tariffs. That’s because the dollar is – like Treasuries – currently acting as a risk-sensitive currency, the opposite of a safe haven. This means USD can jump alongside battered equities at any hint of good news on trade, but we suspect that only a substantial reversal of protectionist measures, particularly regarding China, can sustainably fix the damage the dollar has been dealt in the past week. Downside risks to USD remain high, and DXY can easily clear the 100.0 support today."