US Dollar: Exceptionalism without cash demand – BNY

BNY’s Geoff Yu observes that recent US Dollar (USD) strength reflects United States (US) exceptionalism rather than fresh cross-border buying, as underweights have already been reduced. In contrast, cross-border investors are selling USD CAST (Corporate Asset-Backed Securitization Trust) at the fastest pace this year despite higher yields. Yu links ongoing CAST liquidation to conflict-related funding needs and warns a reversal could signal fading enthusiasm for current investment themes.

Dollar strong but CAST flows weak

"The dollar did not see aggressive cross-border buying around last week's Fed meeting and IMM dates, largely because hedge reduction has been underway since late April. Our data show that cross-border dollar underweights moved from roughly 10% above their rolling 12-month average (holdings score -1.10) to around 20% below (holdings score -0.80) by the end of last week."

"We therefore view recent dollar strength as a reflection of renewed U.S. exceptionalism rather than fresh positioning demand, particularly as currency valuations appear more attractive than their equity market counterparts."

"However, we are not seeing the same interest in cash and short-term instruments (CAST), despite rising U.S. yields. This asset class is typically highly sensitive to rate expectations and often benefits during periods of market stress as investors raise cash."

"Instead, cross-border investors are liquidating CAST at the fastest pace of the year, even with higher yields and a generally supportive risk backdrop. Aggregate flows remain much more stable, suggesting domestic demand is offsetting foreign selling."

"A reversal in CAST outflows would be notable. It could signal that enthusiasm for the current investment themes is beginning to fade and that investors prefer to rebuild cash reserves rather than deploy additional capital."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)