When the consensus on the ‘secure shelter’ characteristic collapses – Commerzbank

In times of growing ‘geostrategic uncertainty’, the US dollar has recently tended to weaken instead of strengthening. The more obvious this pricing behavior of the US currency becomes, the more it could be intensified, says Ulrich Leuchtmann, head of currency research and raw materials of Commerzbank.

The USD could be losing its status as ‘safe refuge’

“‘Safe refuge’ is a value in itself. A financial instrument (active or currency) that has this characteristic promises performance precisely when it is most needed. Therefore, it is particularly valuable. Not because of the expected amount, but by the expected temporal profile of future yields. In reality, since performance expectations are extremely uncertain, this is very importantly the most important dimension to evaluate a financial instrument.”

“To function as a ‘safe shelter’, a financial instrument needs certain fundamental characteristics. However, the most important thing is that everyone should believe that everyone else see it as a ‘safe refuge’. Only then can it be expected that the attractive temporary profile of the returns will materialize in the future. This means that there is a risk of a self -reforting process. If the market participants lose the faith in which the consensus on the status of secure refuge of the dollar will continue. It will collapse.

“It is not so unlikely that it can be ignored. Especially since yesterday it was another day in which both the yields of the US government bonds rose as the dollar weakened. This means that the increase in returns was not a reflection of a flight towards quality, but rather a consequence that investors demand a higher risk premium to keep the US government bonds. The American T-Note-has also been tarnished.

Source: Fx Street

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