Untangling the Currency Effect
Risk-appetite set to decline unless dollar recovers
What would happen to investors’ risk appetite if global currency markets stabilised at their current levels? In our view, the cumulative shock from the weak dollar has already reduced the recommended allocation to equities for most developed markets. This includes the US, though not by very much. The only way to avoid further reductions is for the dollar to retrace some its losses. If all major currencies stay where they are, risk appetite in most countries is likely to trend lower. The only significant exception is China.