Gionakis (Aviva Investors): Why is the dollar falling?
Vasilios Gkionakis, (Senior Economist and Strategic Analyst at Aviva Investors) published a new analysis on the course of the dollar. He interprets its decline as a result of currency risk hedging by investors in US bonds and stocks.
Such as notes, since mid-January the weighted trade index The dollar has fallen about 9% %. Initially, this decline coincided with the decline in US bond yields. However, from early April onwards, yields moved sharply upwards, while the dollar continued to weaken. This development is clearly reflected in the Graph 1, where the major disconnect between the yields of US ten-year bonds and the course of the dollar is recorded.
Chart 1: Major decoupling of yields and dollar
Source: Aviva Investors, Macrobond, Bloomberg
The curve shows the yield on the 10-year US Treasury note (US10Y) and the path of the Bloomberg Dollar Index (BBDXY), capturing the divergence between interest rates and currency from mid-2024 to mid-2025.
One interpretation he cites is that equity capital flows have been the main driver: as the market prices the decline of American exceptionalism, it directs equity positions outside the US and towards other developed markets, putting pressure on the dollar.
He is receptive to this argument but finds weaknesses when examining the empirical data. He argues instead that the dollar's decline is much broader than a restructuring of equity flows and is related to underlying risk premia.
First, it explains that large equity managers do not substantially change their (strategic) asset/country allocations over such short periods of time. And while it is true that the strengthening of EUR/USD had been correlated with relative Eurozone/US equity performance, the correlation has broken down over the past month (Graph 2).
Chart 2: EUR/USD is strengthening despite European stocks lagging behind US stocks recently.
Source: Aviva Investors, Macrobond, Bloomberg
As shown in Chart 2, the EUR/USD exchange rate continued to rise even as the EuroStoxx 600 index relative to the S&P500 followed a downward trend.
Beyond actual capital flows into stocks, he believes that the most important driver for the currency is (more flexibly adjustable) hedging of currency risk: for years, the strength of US stocks and the dollar have coincided, providing little incentive to effectively hedge positions in US stocks.
As investors reassess American exceptionalism, they may increase their currency hedges, putting additional pressure on the dollar.
As he explains, the US has enjoyed an outrageous privilege for decades, with high debt issuance meeting the constant appetite of foreign investors for US bonds. This, he says, is changing, as the US appears to be running large fiscal deficits for years without a corresponding growth boost – and in an environment of an already burdened net international investment position.
All of this, he argues, is causing concern in markets, which require a combination of higher yields and a weaker currency to continue lending to the US. In other words, the decline in American exceptionalism leads to an increase in the US risk premium and weighs on the value of the dollar. He notes that the estimate of the risk premium for the US 10-year has correlated quite well with the course of the dollar since April.
As seen in Graph 3: The rise in the risk premium explains the fall of the dollar.
Chart 3: Relative risk premiums as a key factor for the dollar.
Source: Aviva Investors, Macrobond, Bloomberg
As shown in Chart 3, the dollar's movement since April has been in line with the increase in the US risk premium relative to the Eurozone. This difference (USD–EA risk premium) acts as a key pressure factor for the parity, as investors demand a higher risk premium to hold US assets.
Gionakis says that similar phenomena have been observed during the Eurozone debt crisis and in the United Kingdom in 2022. At that time, risk premiums in the Eurozone and the United Kingdom increased by at least 100 basis points. Since “Liberation Day,” risk premia have risen by about 35 basis points in the US. He concludes that destabilizing trade and institutional policies are unlikely to contain the rise in risk premia in the US and estimates that dollar weakness still has some way to go.
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