Dollar is now the only possible shelter for what's shaping up to be the biggest destruction of shareholder value since the global financial crisis, according to Citigroup Inc.
With global equities already down $23 trillion in 2022, the greenback's inverse relationship to risk assets makes it the only game in town for at least the rest of the year, the macro strategists wrote in a note dated 15 September.
They also said it would take a "deep recession" to bring down US inflation significantly lower, implying a prolonged drop in corporate profits and equities before the Federal Reserve pivots.
A bear market in global stocks and fixed-income markets has left investors with little choice but to increase their cash allocations, which Bank of America Corp.'s September fund-manager survey showed was the highest on record.
This week's quicker-than-expected US inflation data that saw traders dramatically increase rate-hike bets put the brakes on a brief recovery in risk sentiment, after every major asset class slid in August – the broadest drop since 1981, reports Bloomberg.
"In a world where central banks are aggressively hiking rates (bad for fixed income) in order to tighten financial conditions (bad for equities), then the only place to hide is in USD cash," wrote strategists including Jamie Fahy and Adam Pickett.
"This makes the USD a high-carry, high-quality currency which acts as a hedge to risk assets contracting."
Citi forecasts the dollar spot index will reach 111.98 within the next three months, about a 2.1% advance from current levels that would mark a new 20-year high. They expect a turning point for the US currency will come next year.
"We have outlined ad-nauseam that the end of the USD bull-run will require either a Fed pivot evidenced via bull-steepening in the US rates curve or a bottoming in global growth expectations," wrote the Citi strategists. "These could be themes for 2023, but not today."