Geopolitical Tensions Reverse Dollar-Risk Asset Correlation

Goldman Sachs has issued a warning that the geopolitical tensions centered in the Middle East this month are reconstructing the traditional inverse relationship between the U.S. dollar and risk assets. This shift is evident in the recent eight trading days, where the dollar's movement has been contrary to that of the S&P 500 index. This stands in stark contrast to the period earlier this year when U.S. assets were broadly sold off following the trade war initiated by Trump, during which the dollar and risk assets exhibited a positive correlation.

The report suggests that this recent trend reflects a shift in the sources of global growth and risk impacts, moving from the U.S. to other regions, primarily the geopolitical developments in the Middle East. However, over a longer time frame of approximately two months, the dollar has maintained a positive correlation with the U.S. stock market. This indicates that as global risk sentiment improves, the dollar tends to strengthen, and vice versa—a significant departure from the dollar's traditional role as a global investor safe-haven currency.

Goldman Sachs also anticipates that the dollar's decline this year will deepen in the coming months. The firm's global head of repurchase trading has noted that increased foreign investor hedging against the dollar's exchange rate will further pressure the currency. This analysis underscores the complex interplay between geopolitical risks, currency movements, and global financial markets, highlighting the need for investors to remain vigilant and adaptable in the face of evolving market dynamics.