10 octobre 2017

Has the Dollar Turned into a « Risk-On » Currency?

October 9, 2017

The dollar is usually perceived as a safe-haven currency for several reasons. Over the last 10 years, the greenback was indeed bought when equities fell the most. This behavior has been all the more pronounced as the Eurozone gradually turned into the epicenter of financial turmoil since 2010. Let’s not forget that the Dollar index reflects the currency’s performance vs. a basket of various G10 currencies (see Table 1). With the USD/EUR being the most prominent member of the Dollar Index, it is not surprising that the Eurozone crisis has been a key driver of the index performance.

Meanwhile, the joint behavior of the Dollar Index and European stocks has profoundly changed since the ECB started carrying out a quantitative easing program. The buying program was first discussed by the ECB in 2014, officially announced in January 2015 and has been implemented ever since March 2015. As shown in Figure 2, since the Quantitative Easing program of the ECB became anticipated by investors, Euro weakness (or dollar index strength) has been accompanied with rising Eurozone equities.

Conversely, with a look on the yield curve, rates are anticipated to rise faster in the US where the business cycle is more mature and the threat to deflation less acute. As illustrated in Figure 3, forward rates suggest investors forecast a difference of about 1.50% between the Fed and the ECB policy rates (until 2022). As a matter of fact, the current cost of hedging a dollar portfolio against an appreciation of EUR/USD has surged to 2.1% (see Figure 4). Thus, the euro is definitely a funding currency and the dollar a risky currency. As the dollar is currently among the highest yielding global currencies, holding the greenback is a natural « risk-on » position. Furthermore, the current account positions also favor the euro as a repatriation currency in contrast with the dollar (see figure 7).

To smooth the noise of correlation, we look at the average correlation between the dollar index and a basket of five global stock index futures in local currencies. The results are presented in Figure 6 which additionally features the gold correlation. It turns out that the dollar used to be a risk-on currency in the early 2000s, then it turned into a flight-to-quality currency from 2009 until 2015. Ever since, the dollar seems to have gradually turned into a « risk-on » currency again as its correlation to stock indices became positive again. The chart also reveals that gold plays the mirror role of the dollar. For instance, gold has clearly switched into a safe-haven asset since early 2015.

For sure, the Eurozone is still in political trouble. Recent German election results cast a serious doubt on further necessary economic integration and Italy is still far from any viable pro-Eurozone coalition in the coming election according to the latest polls. At the same time, the dollar has turned into a risky currency from an economic and a financial point of view. But from a political perspective, the picture looks much less clear. Both the US and the Eurozone compete for the (infamous) prize of the most discredited administration among developed countries.

Table 1: G10 currencies weights in the calculation of the Dollar Index Performance (ICE).



Euro (EUR)


Japanese Yen (JPY)


British Pound (GBP)


Canadian Dollar (CAD)


Swedish Krona (SEK)


Swiss Franc (CHF)


Figure 2: 1-year (250 days) rolling correlation between the Dollar Index and the Euro Stoxx 50.

Figure 3: Comparison of US Forward Rates Curve (orange) and EU Forward Rates Curve (green)

Figure 4: Annual cost of hedging against the rise of EUR/USD (source: spread between Spot and 3M Currency Forward in Bloomberg).

Figure 5: G10 Currencies 1-Week Deposit Rates Ranked from the Highest to Lowest.

Figure 6: Average 250-day rolling correlations of the Dollar Index vs. 1) Gold, and 2) a basket of 5 stock index futures (US S&P 500, Euro Stoxx 50, UK FTSE 100, Japan Nikkei 225, USD Emerging MSCI).

Figure 7: Compared Current Account Balances of the US (blue) and Euro Zone (yellow).