In a note to clients on Friday, Deutsche Bank stated that the dollar’s traditional role as a "safe haven" can no longer be taken for granted during a market correction driven by the AI sector.
Furthermore, it has been noted that, of late, tech stocks and the dollar have repeatedly fallen at the same time.
George Saravelos, the bank’s global head of FX research, noted that the U.S. has become exceptionally reliant on foreign capital inflows into its equity market. These inflows currently fully fund the U.S. current account deficit—a rare phenomenon that coincides with a high concentration of capital in the stock market.
"We estimate that roughly 90% of the value of the more than $20 trillion in U.S. equities held by foreign investors is due to price appreciation rather than actual purchases," Saravelos wrote.
He also warned about hedging dynamics. Over the past decade, a negative correlation between U.S. stocks and the dollar has encouraged foreign investors to hold their U.S. equity positions unhedged.
However, he argued that there is compelling evidence that this correlation turns positive when the source of a shock to the stock market originates within the United States.
"In such a scenario, the dollar amplifies losses from falling stock prices and triggers a shift toward hedging the entire volume of U.S. asset holdings—a dynamic similar to what we observed around 'Liberation Day,'" he noted.
Saravelos added that a decline in the real yield on U.S. Treasury bonds would reinforce this pattern of a weakening dollar accompanying a drop in stock prices, as it would signal a downward revision in corporate capital expenditure expectations. "However, we want to emphasize that the risks for the dollar are much more two-sided than the market has been pricing in over the last few weeks," he concluded.