USD: US-EU trade tensions drive risk-off markets – BBH

US-EU trade tensions are weighing on financial market risk sentiment. Global equity and bond markets are selling off while gold prices hit new record highs. US Dollar (USD) is behaving unusual for a risk off phase, as it’s down against most major currencies, notably Euro (EUR). EUR/USD is up nearly 1.5% since Monday, BBH FX analysts report.

Dollar weakness reflects hedging, not 'sell America'

"USD weakness likely reflects increased FX hedging by non-US investors holding US dollar securities, and not a 'sell America' trade. Indeed, the US Treasury International Capital (TIC) data showed that in the twelve months to November, foreign investors accumulated a record $1569bn of long-term US securities (treasury bonds & notes, corporate bonds, equities, gov’t agency bonds)."

"The idea that the Eurozone can weaponize its Treasury holdings if trade tensions with the US escalate does not pass the smell test. The Eurozone is the largest foreign holder of US long-term Treasuries, with 21% of total foreign holdings. However, the depth of the Treasury market means that any coordinated sales by Eurozone investors would have limited impact on Treasury yields. Eurozone holdings of US long-term Treasuries account for less than 5.5% of total Treasury securities outstanding."

"Over the longer term, loss of confidence in US trade and security policies, combined with political interference with the Fed’s independence threaten to accelerate the dollar’s declining role as the primary reserve currency. That’s a structural drag on USD. In the near term, we expect USD to continue to trade within the range in place since June last year. Most major central banks are done easing, while the Fed has room to deliver additional rate cuts."