Christian Broda, Piero Ghezzi & Eduardo Levy-Yeyati

In recent years, economic doomsayers have predicted an apocalyptic scenario in which investors turn their back on US assets, leading to a downward spiral of dollar weakening and US rate steepening. While this apocalyptic scenario did eventuate to a degree, it occurred in a very different way to that which was envisaged. A few months into the crisis, it is clear that the global flight to safety has benefited Treasuries, and that the financial deleveraging has benefited the USD, along with other so-called “funding” currencies.

This behavior begs the question: will we see a full reversal of these trends once
economic and market conditions normalize?


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