Is the US dollar no longer a safe haven?

Source: Barons Chinese

In the past, when the United States imposed tariffs on trading partners, the US dollar would usually strengthen. One of the reasons for its recent weakness may be that the US dollar is losing its status as a safe haven asset.

After the new round of tariffs imposed by the United States on Canada, Mexico, and China took effect, global stock markets generally fell on Tuesday (March 4), but some analysts pointed out that what is even more unsettling is the reaction of the US dollar.

When the United States imposed tariffs on trading partners in the past, the dollar usually strengthened. Stephen Miran, the chairman of the White House Council of Economic Advisers nominated by Trump, once said that the imposition of tariffs on China during Trump’s first term was one of the reasons for the depreciation of the renminbi, offsetting the impact of tariffs on consumer prices in the United States.

The U.S. dollar is expected to rise after the 2024 U.S. presidential election, partly due to the expectation of the dollar’s appreciation brought about by Trump’s tariff plan. Some analysts now believe that the dollar’s softness so far this week should be cause for concern.

Novi Loren’s Chief Investment Officer and former Moody’s Head of Quantitative Strategy Lily Francus(Lily Francus)posted on social media earlier this year, “The rise of the dollar due to tariff-related news is not scary, what is scary is the dollar falling due to tariff-related news.” Francus recently shared this article again on social media platform X.

George Saravelos, Global Head of FX Research at Deutsche Bank, pointed out that the US dollar’s downward reaction may be due to several reasons, with one reason particularly worrisome: the dollar may be losing its status as a safe haven asset.

The dollar softened after the new round of tariffs took effect

Source: FactSet; Deliwanbang

Sarawelos commented, “Sometimes investors can ignore certain market reactions, but this time is different.”

The dollar’s decline may also be due to other reasons, such as funds flowing out of the US stock market and into the European and Chinese stock markets, potentially weakening demand for the dollar from investors.

In addition, according to recent data, at the end of last year, the US current account deficit as a percentage of GDP exceeded 4%. Salavelos said that in the past, when this ratio reached such an extreme level, it coincided with the peak of the period when the US dollar was overvalued.

However, Salawelos tentatively emphasized some reasons why he believes the drop in the US dollar is due to the loss of its safe-haven status.

Salavelos said that the long-term negative correlation between the US dollar and risk assets such as US stocks has been broken, with both experiencing synchronous declines. In addition, the US dollar has weakened against both high-beta and low-beta currencies, another sign of pressure on the US dollar.

The expected increase in defense spending has boosted the euro/dollar, which is another reason for the dollar’s weakness, and has provided support for European bond yields, a key driver of exchange rate movements.

The expected increase in European defense budgets has driven European defense stocks to record highs on Monday. However, foreign exchange strategists at Rabobank are skeptical about whether the recent rally in the euro can be sustained.

One potential consequence of the recent weakness of the US dollar is that the impact of Trump’s tariffs on US inflation may be magnified as a result.

On Tuesday, the US dollar fell against the Canadian dollar, and also weakened against the Euro and the Renminbi. Meanwhile, the US dollar continued to climb against the Mexican Peso.

FactSet’s data shows that the US dollar index, which measures the changes in the exchange rate of the US dollar against a basket of major currencies, fell 0.5% to 106 on Monday, hitting its lowest level since December last year.