Forex: The Paradox of Safe-Haven Status

In the short term, in a global environment made dangerous partially by U.S. economic problems, the U.S. dollar is a safe haven for the risk averse investors worldwide

On the face of it it, this may sound absurd and indeed many anticipate a dollar crisis, and may be right in the long term. Yet on Monday, in a scenario that will likely repeat itself, there was bullish action in the dollar, as Wall Street was bad but emerging markets were far worse. The dollar is living up to its safe haven status as bad macro news in emerging markets boosts it. The dollar continues to rise, especially every time a bit of air is let out of the asset price bubble in the Shanghai and Hong Kong stock markets.

Take the EUR/USD and GBP/USD for examples. EUR/USD was over $1.45 in early August, and the GBP/USD peaked at just over over $1.70. The dollar strengthened, until last week, when better than expected growth data out of Germany and France, combined with poor retail sales out of the U.S. drove the EUR/USD near to $1.43. Yet on Monday EUR/USD was testing resistance below $1.41 following a rough day for Asian equities, and better than expected U.S. manufacturing data. Likewise GBP/USD is now slightly above $1.63. Of course the Pound has its own set of problems similar to the USD. Among the major currencies, only the Yen outshone the dollar on Monday.


Year to date Shanghai is up 57 % and the Hang Seng is up about 40 %. Yet the markets were down 6% and 3.6% respectively on Monday. This capital isn't fleeing to EU or UK assets(or IMF special drawing rights), just yet. A lot of this capital is moving into dollar based assets such as Treasuries. Even though the U.S. dollar has its problems, this puts upward pressure on the dollar, the so called safe haven.

The fiscal position of the U.S. government is beyond dismal, and the U.S. economy will likely lag behind the rest of the world in terms of growth. These two key factors point to a long run dollar decline, the occasional American green shoot notwithstanding. Yet the dollar remains the main global reserve and transactional currency. In the absence of fully developed viable alternatives, the dollar will continue to get a short run boost each time there is a bad day in emerging markets.