Risks for the dollar: stagflation, deficit and political uncertainty

BofA analysts noted that the recent sharp drop in the US dollar is accompanied by a decline in the value of US stocks and treasury bonds. This is due to an increase in the risk premium in the United States amid fears of stagflation, an increase in the budget deficit and political instability. 

The report emphasizes that such dynamics can lead to a further outflow of the dollar from central banks and large corporations, which can trigger a long period of its weakening.

BofA recommends that companies review their hedging strategies, preferring put spreads instead of standard options due to high market volatility. The advantages for emerging markets in the context of a weak dollar are also highlighted. The low volatility index (VIX) will allow these countries to cut rates, offsetting the slowdown in the global economy. However, the currencies of such countries remain vulnerable during periods of high risk, especially when the VIX is above 40.

At the same time, BofA believes that the Fed will not change rates in 2025, despite inflationary risks. Analysts predict that a slowdown in global growth and a decrease in the impact of tariffs on inflation may soften monetary policy outside the United States.