“The one real example of American exceptionalism in terms of financial matters remains the ability to print the world’s reserve currency,” he said in the note. “Yet this is precisely what is threatened by last week’s risk-off action, in which both the US dollar and the US Treasury bond market sold off in response to US stock market action, which flashed growing recession concerns.”
The US Treasury is considered among the world’s top safe-haven assets, as investors usually pile up these American government bonds in times of crisis as part of their shift to safety. The purchases lead to a fall in yields on the US Treasury and the dollar strengthening.
Wood wrote that he cannot remember a similar case in the past 30 years where risk-off action was accompanied by a weakening dollar.
“The Asian Crisis and the resulting Long-Term Capital Management (LTCM) blowup, the 2008 US subprime mortgage crisis and the 2020 Covid-induced panic, all triggered a strong-dollar risk-off move before the Fed intervened with the inevitable bailout, resulting in ever greater socialisation of credit risk,” he said.
In a recent ET interview, S Naren, CIO of ICICI Prudential Mutual Fund, had raised similar concerns about the weakening dollar and rise in US bond yields of late during the sell-off in global equities in response to Trump’s tariff actions.”…there was a situation where the US yields went up, which means that people are using less of the US Treasury as a risk-free asset,” said Naren. “Historically, whenever the US or global stock market fell, the safe haven used to be the US Treasury and US dollar. This time, it is gold, and this is worrying.”
