Deutsche Bank told clients on Friday that the U.S. dollar's traditional safe-haven status cannot be assumed in an environment where AI-related market moves trigger corrections in technology stocks. The bank's note, authored by George Saravelos, global head of FX research, outlines how unique flows into U.S. equities and changing hedging incentives could produce a more balanced set of outcomes for the currency.
Saravelos argues the U.S. is unusually dependent on foreign equity inflows. According to his note, these inflows currently finance the entire U.S. current account deficit - an uncommon situation that coincides with very high concentration within the U.S. equity market.
He quantifies the phenomenon by estimating that roughly 90% of the more than $20 trillion value of U.S. equities held by foreigners is attributable to price appreciation rather than fresh buying. That distinction matters because it implies a large portion of foreign ownership reflects gains already earned on positions rather than new capital entering the market.
The note also focuses on hedging behavior. Over the past decade, a negative correlation between U.S. stocks and the dollar encouraged many foreign investors to leave their U.S. equity exposure unhedged. Saravelos highlights evidence that this relationship can invert when the source of an equity shock is centered in the United States.
"In this world, the USD becomes additive to equity losses and incentivizes hedging shifts to the stock of US assets akin to the price action we saw around Liberation Day," he wrote.
That dynamic, the note warns, would make dollar moves amplify rather than offset equity declines, prompting portfolio adjustments that could reinforce selling. Saravelos adds that falling U.S. real yields would be consistent with a scenario where a weaker dollar accompanies weaker equities, since lower real yields would reflect downgraded capital expenditure expectations.
Overall, Saravelos emphasizes that recent market pricing has underplayed downside risk to the dollar. "What we do, however, hope to emphasize is that the risks to the dollar are a lot more two-sided than the market has been pricing over the last few weeks," he said, signaling that both appreciation and depreciation are plausible depending on how equity shocks and hedging responses unfold.
The note frames a set of interlinked concerns for currency and equity markets: concentrated equity ownership by foreigners, the heavy role of price appreciation in foreign holdings, and potential reversals in hedging patterns if U.S.-centric shocks emerge. These factors, taken together, mean the dollar's behavior in an AI-driven correction could differ materially from its historical safe-haven performance.