Credit Agricole sees the return of the "USD frown"—the relationship between USD and US equity/FI performance—driving near-term USD weakness. But they dismiss fears of a full-blown crisis akin to the UK’s "Truss moment," citing continued global demand for Treasuries and the USD’s reserve status.
Key Points:
USD Selling on Risk Aversion:Investors are selling USD as US equities weaken and Treasury yields rise, fearing capital outflows and fragility in US fixed income following Moody’s sovereign downgrade.
Political and Policy Concerns:Stalled fiscal stimulus talks in Congress and Fed commentary on stagflation risks have amplified worries over the macro backdrop and reinforced the USD’s vulnerability to risk sentiment.
But No 'Truss Moment':Credit Agricole does not expect a disorderly selloff in US debt akin to the UK gilt crisis under PM Liz Truss. They argue long-end yields may stabilize, especially given the USD and USTs remain global reserve anchors.
Structural USD Support Intact:Despite near-term volatility, global demand for USD assets remains resilient, which should cap USD downside, especially against currencies from economies with weaker fundamentals or lower yields.
Conclusion:
While the USD is under pressure from equity and bond market jitters, Credit Agricole sees this as a tactical adjustment rather than a structural shift. The market is not pricing in a systemic credibility shock like the UK faced in 2022, and the USD’s reserve status should limit sustained underperformance.
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This article was written by Adam Button at www.forexlive.com. Read More Details
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