Synopsis: BofA notes that although the latter half of 2023 observed lower stock values paired with a robust USD, the direct correlation has started to wane. Interest rates are playing a growing role in USD strength. It's essential to differentiate the nature of 'risk-off' events to gauge their impact on the USD.

Detailed Analysis:

• Dynamics of USD with Equities: A prevalent trend of declining stock values alongside a buoyant USD has been recorded in 2H 2023. However, the causal link between these two is diminishing. Instead, interest rates have begun to contribute more significantly to the strength of the USD. Interestingly, the expected correlation (or skew) between USD strength and equity market sell-offs hasn't shown a marked increase.

• Yields Playing a Key Role: Elevated yields have been restricting the potential gains of USD during risk-off scenarios. This effect is particularly pronounced when there's a US-centric shock. A critical parameter to keep an eye on is the interplay between services and manufacturing. In scenarios where risk-off is instigated by external factors, USD often gains strength. But when the risk-off sentiment is due to US-centric issues, the USD doesn't respond as positively.

• Risk-Off Triggers and USD Dynamics: The nature of a risk-off event can be pivotal in determining its effect on the USD. If a risk-off environment arises from external challenges, the USD tends to benefit more than when the trigger is an internal US issue. One method to discern this is by comparing the performance of US services against manufacturing. Manufacturing sectors, more susceptible to global challenges, can serve as a bellwether. In contrast, services, being primarily non-tradable, give insights into domestic demand. A relative drop in services could signal a weakening in domestic demand compared to global demand, historically correlating with fluctuations in the medium-term USD dynamics.

Conclusion: While BofA remains bullish on the USD for the remainder of 2023, they foresee more considerable downward pressure by the second half of 2024. For investors, understanding the underlying triggers of risk-off environments can offer insights into potential USD movements.