September has historically been a seasonally weak month for stocks, and the market’s performance over the past month has burnished that reputation.

Hawkish comments from key Federal Reserve officials have further compounded market nervousness at a time when investors are anxiously weighing their next move. Cleveland Federal Reserve President Loretta Mester said last week she sees room for more rate hikes and that a recession would not stop the central bank from acting.

With monetary policy set to tighten further in the months ahead, and Wall Street mired in the depths of a bear market abyss, many investors are beginning to wonder if it is now the time to exit the stock market and put their money into a safe haven. If so, the dollar is one of the most popular options.

Dollar premiums will likely remain elevated for the rest of this year due to the demand for safe and liquid assets. The basis for the pound, euro and yen all tumbled last week. While the regular quarter-end seasonality is part of the reason, the sharp drops in the basis signalled investors’ rush for dollar funds.

There was no place to hide for investors in the third quarter but the dollar. Global equities, bonds, gold, and commodities were lost during the period while the greenback surged.

The period was fraught with plenty of concerns ranging from aggressive monetary policy tightening to risks of a global recession to the continued war in Ukraine to UK asset selloffs. None of them will probably go away anytime soon.

A gauge of liquidity for US Treasuries is near the worst level since the pandemic, suggesting investors are scarce even in the most-favoured haven. All these suggest the dollar is likely to continue to command elevated premiums.

The UK is another reason for buying dollar

The Biden administration is alarmed over the market turmoil triggered by the new UK government’s economic program and is seeking ways to encourage Prime Minister Liz Truss’s team to dial back its dramatic tax cuts.

Officials inside the US Treasury Department are concerned about the volatility in financial markets and potential spillover to the broader economy and are working through the IMF to apply pressure on Truss’s government, according to people familiar with the matter.

The additional national bank holiday in September will probably bump the UK economy into a technical recession in the third quarter. While we expect a rebound in Q4, the economy will remain under pressure from the cost-of-living crisis.

UK consumer confidence is now below levels seen during the financial crisis, Covid lockdowns and recessions in both the 1980s and 1990s. The GfK measure fell to -49 in September, the lowest level since the series began in 1974.

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Fullerton Markets Research Team
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