The capital markets are facing a turbulent phase. Historically, they tend to react sensitively to changes in the interest rate landscape. In particular, when interest rates initially rise and then fall again, significant market corrections and increased volatility often occur. A similar development could also be imminent in the current situation.
The dynamic between interest rates and volatility shows that the markets generally respond positively to clear interest rate trends. However, as soon as there is a change in direction, especially when interest rates start to fall, the uncertainty of market players increases. This uncertainty often leads to greater fluctuations and stronger movements on the capital markets.
The foreign exchange market (FX market) in particular, which has remained relatively calm in recent years, could experience a doubling or even tripling of its volatility in the coming years and thus return to the level of the 1990s.
The impending turbulent phase can be attributed to several factors. One of the main reasons is the end of the long-lasting one-sidedness of market trends. Both the US dollar and the US equity markets have shown strong and continuous development in recent years. However, such one-sided trends tend to end abruptly after longer phases, which is associated with stronger price swings.
Another factor is geopolitical developments, in particular the increasing formation of blocs and the associated self-interest of countries. More and more countries are relying on gold instead of USD as a currency reserve, which points to a possible weakening of the dominance of the US dollar. The debt problem in the USA also plays a decisive role. The persistently high level of new debt and the growing burden of interest on debt – which already amounts to over USD 1,000 billion a year – will become a major challenge for the financial markets in the long term. These burdens make it unlikely that capital market interest rates in the USA will fall quickly or significantly.
With regard to the US dollar, its dominance as the world’s reserve currency could continue to decline. Asian economies are placing greater emphasis on their own currencies and demand for USD-based assets could fall, which should have a lasting impact on the value of the US dollar. As a result, the euro and other major currencies could gain strength against the USD.
For investors, the coming months and years will be characterized by increased fluctuations and uncertainties. However, those who prepare for these developments early on can be better equipped. A strategic rethink of the investment strategy, increased diversification and a greater focus on non-currency assets such as gold could be sensible steps to meet the challenges ahead. A clear plan for volatile times is crucial in order to remain capable of acting and not be overwhelmed by market dynamics.
