In our latest Briefing Note, Stephen Jen and Joana Freire revisit one of Eurizon SLJ Capital’s most important macro frameworks: the Dollar Smile.
The question is simple, but important. Can investors still rely on the dollar to rally during risk-off episodes?
Their answer is nuanced. The left side of the Dollar Smile remains intact, in their view, because US Treasuries continue to dominate the global safe-haven universe. Yet that conclusion comes with a warning. The standing of US Treasuries cannot be taken for granted indefinitely.
Foreign central banks have reduced their exposure to US Treasuries over the past decade. Private investors, both domestic and international, have stepped in to fill that gap.
The safe-haven role of US Treasuries is no longer being supported in quite the same way as it was in the post-Bretton Woods era.
The note also compares the safe-haven performance of Treasuries, the dollar, gold, RMB bonds, JGBs, Bunds and other assets during periods of market stress. The conclusion is not that US Treasuries are unchallenged in every respect. Rather, it is that their scale, liquidity and continued private-sector demand remain central to the global market architecture.
Key quote
“The left side of the Dollar Smile is still curved, in our view, because US Treasuries remain the dominant global safe-haven asset.”
Inside the note
The research covers:
- US Treasuries remain the dominant safe-haven security by size
- US Treasuries remain one of the best safe haven asset, by price
- Central banks have indeed been divesting from the USD and US Treasuries
- But the private sector has stepped up to fill the void
- Some thoughts
- Bottom line
For professional investors seeking differentiated macro research on currencies, rates, capital flows and global policy risk, this note is an example of the frameworks available through Eurizon SLJ Capital’s research service.
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ESLJ-171125-R1
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