Crédit Agricole: A Flatter "USD Smile" Could Weaken the Dollar’s Safe-Haven Appeal - FJElite

The financing of the US current account deficit has shifted heavily toward risk-sensitive assets, with more than 80% of foreign inflows over the past year directed into equities and other risk-correlated US assets, compared with only around 19% into Treasuries. That could alter the traditional “USD smile,” where the dollar benefits both from strong US growth and higher rates on one side, and from global risk aversion on the other. During future risk-off episodes, foreign investors may now reduce exposure to both US risk assets and the dollar, weakening its safe-haven performance and potentially favouring alternatives such as gold.

The rates side of the USD smile may also offer limited support. The Fed is expected to leave rates unchanged, with forward guidance, second-quarter GDP and core PCE likely to drive the next move. Current expectations for two further rate hikes appear too hawkish and could be challenged by incoming data and Fed communication. Elsewhere, unchanged decisions from the BoE and BoJ may also disappoint hawkish market pricing, creating