Woof! – Global Capital Flows After Brexit

Does the response of international investors to the UK’s Brexit vote tell us more about the peaking US dollar than prospective European weakness? A key question to pose after the UK Brexit vote was why the US dollar did not rally by more? For Sherlock Holmes fans this looks like another ‘dog that did not bark’. On its trade-weighted index the US unit rose by a mere 1.8% in the initial 3-day period of the ‘shock’. As with the trade-weighted Chinese Yuan, the US dollar remains down by around 5% this year. This latest muted response of the US dollar sits uncomfortably alongside many pundits who continue to push the idea of a super-strong US currency. There may be two reasons behind this: (1) the US dollar is being seen less as the ‘safe haven’ currency – gold jumped by 5% and the trade-weighted Yen by 6.2% (since 2008 the Yen index has a whopping negative 0.81 correlation to risk appetite indexes) and/ or (2) global investors have already invested heavily in dollars over the past few years and need no more.