Dollar only place to hide in 2022 as risk assets sink: Citi strategists

Bloomberg

An overvalued dollar is now the only possible hedge for what’s turning into the biggest destruction of shareholder value since the global financial crisis, according to macro strategists at 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 strategists wrote in a note. It would take a “deep recession” to push US inflation significantly lower, implying a prolonged drop in corporate profits and equities before the Federal Reserve pivots, they said.
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.
“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.