With Markets in Disarray, International Investors Are Stockpiling US Dollars

Foreign investors selling stocks and bonds are hoarding the US dollar as market volatility picks up.

Typically investors repatriate cash into their local currency, but not this time. US capital flow data show the foreign cash pile of dollars is close to records as investors reduce risky assets in portfolios and hang on to the world’s reserve currency.

“The dollar has assumed the role of the global stagflation hedge with dollar cash being one of the few financial assets offering returns,” Deutsche Bank currency strategist George Saravelos in a note to clients. Stagflation occurs when slow growth combines with rising prices.

The trend is another example of how decades-high inflation, and central banks’ response to it, is upending all manner of markets, including stocks, bonds, cryptocurrencies and commodities. The S&P 500 last week entered a bear market, or a drop of 20% from a recent high, and the dollar is emerging as the world’s haven. That means that the once-calm currency market is gyrating as well, as the Federal Reserve and other central banks draw down their easy-money policies in an attempt to stop inflation.

The WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, is up 3% so far this month. The dollar pared gains last week after the Fed raised interest rates by 0.75 percentage point, but it is still up about 12% over the past year.

As markets react to inflation and high interest rates, technology stocks are having their worst start to a year on record. WSJ’s Hardika Singh explains why the sector — from tech giants to small startups — is getting hit so hard. Illustration: Jacob Reynolds

The Swiss franc and Japanese yen have traditionally also been havens when financial markets are under distress. But Japan’s central-bank policy—it has so far kept rates around zero—has thwarted the currency’s status as an alternative asset in which to park cash, and the Swiss franc has remained on the sidelines.

While asset managers contend that the dollar is overvalued at current levels, they don’t see many other options. They generally agree that central-bank policy and a flight from risky assets are keeping the world’s reserve currency at multidecade highs even though concerns of a US recession are rising.

“In real terms, with high inflation, you would expect the dollar to depreciate in the long run—that is what the theory says—but the picture is tricky,” said Ugo Lancioni, head of global currency management at Neuberger Berman. Mr. Lancioni expects the dollar to weaken once global growth concerns abate and geopolitical tensions, such as the war between Russia and Ukraine, cool.

The dollar continued to advance against the Japanese yen after the Bank of Japan reiterated Friday that it wanted rates to stay around zero. Gov. Haruhiko Kuroda said raising rates could hurt the Japanese economy, which is dealing with lower inflation than other countries, including the US and the UK

The British pound recovered losses against the dollar after the Bank of England on Thursday raised its key interest rate by a quarter percentage point for the fifth consecutive time. Hedge funds and asset managers said they are still selling the pound against the dollar because the central bank isn’t raising rates quickly enough. They expect that inflation will become more embedded in the UK economy, slowing consumer spending. Inflation in the UK reached a 40-year high of 9% in April, compared with 8.3% that month in the US The pound is down more than 11% against the dollar over the past year.


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Mark Dowding, chief investment officer at one of Europe’s largest fixed income managers, BlueBay Asset Management, is shorting the British pound, a bet that it will fall, because of a coming “stagflationary mess.”

“We think the central bank here [in the U.K.] is getting it all wrong and that will end in tears,” said Mr. Dowding. “The worst is a situation where markets lose faith in the central bank to bring inflation under control.”

Mr. Dowding said he is broadly invested in the US dollar across portfolios.

This week, investors will scrutinize data on the US housing market for clues regarding the effects of higher borrowing costs. Central banks will remain in the spotlight with Fed Chairman Jerome Powell testingifying in front of the Senate Banking Committee. Wall Street analysts are also keeping an eye on oil prices as the next shock that could drive the dollar to fresh highs.

“We think that we will see an oil spike at some point this summer,” said Stephen Gallo, European head of FX strategy for BMO Capital Markets. “With the United States’ near energy-independence status and the dollar still being the primary currency for oil purchases, an oil spike would induce the US dollar upside.”

Navigating the Bear Market

Write to Julia-Ambra Verlaine at Julia.Verlaine@wsj.com

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