03.10.201911:09 Forex Analysis & Reviews: Colossus with feet of clay: is the dollar no longer a protective asset?

For a long time, the American currency has maintained the status of a protective asset that could preserve capital during times of global crisis and recession. However, the situation of the dollar has now been shaken, and its reliability has been called into question.

Experts at Commerzbank, the largest bank, believe that one of the reasons for the loss of the safe haven status by the dollar was the protracted trade war between Washington and Beijing. The American currency held steady for a long time, justifying the name of a protective asset, but in the end, it turned out to be a colossus with feet of clay, ready to collapse at any moment.

In addition, Commerzbank believes that the massive exodus of investors in US assets will not help preserve capital. The US dollar is no longer considered a reliable means of saving funds, analysts say. The US economy is now as vulnerable as the others, and political instability in the US is undermining the protective status of dollar assets, according to Commerzbank.

Another reason for the loss of the dollar status of the currency monolith by experts is the growing slowdown in the US economy. According to the forecasts of Commerzbank strategists, US GDP growth may slow down to 2%. This worries specialists, since historically, a drop in this indicator below 2% almost inevitably leads to a recession.

A contrast against this background is yesterday's growth of the US dollar index. We can recall that this indicator shows the ratio of the US currency to a basket of currencies of six countries - key US trading partners. It includes the pound, euro, yen, Canadian dollar, Swedish krona and Swiss franc. On Wednesday, October 2, the dollar index was trading near the psychologically important "anniversary" level of 100, which caused increased interest of market participants. Over the past day, leading US indices added about 0.5% and continued to grow.

Currently, the US dollar index has declined slightly, but has successfully maintained its gains. It trades in the range 98.32–98.34, reaching two-year highs. According to analysts, the exchange rate of the American currency has appreciably increased in relation to other world currencies in the past few weeks. Thus, Commerzbank believes that now is a great time to sell the dollar.

In favor of the sale of the American currency is evidenced by weak data on ISM in the US industrial sector. Recall, the ISM index shows the level of business activity in American industry. Its fall testifies to the weak prospects of the country's economy, confident in Commerzbank. Thus, the US dollar instantly reacted to the deterioration in ISM data by a sharp decline. According to the bank's specialists, a defensive asset, which is truly a currency monolith, a reliable fortress for capital, does not behave this way. Commerzbank believes that the dollar has lost stability, and the role of an asset-seeker is beyond its reach.