U.S Dollar - Safe Haven No More?

For years, whenever significant political or financial turmoil reared its head anywhere on the globe, investors would turn to the U.S. dollar as a safe haven.

Yet as the chaos in North Africa has grown over the past month, investors have largely shunned the dollar and sought shelter elsewhere. They have turned to other traditional islands of stability, buying Japanese yen and the Swiss franc.

What has especially raised eyebrows has been the move by investors to buy euros, a currency traditionally seen as a riskier prospect than the dollar, especially with the euro zone's debt problems still largely unresolved.

This has sparked a debate over whether the dollar has lost its safe-haven status.

"Over the last 20 years, people have always moved into the dollar on any sort of uncertainty in the global economic space, but what we've seen over the past two weeks is actually a terrific move out of the dollar," says Douglas Borthwick, a managing director at Faros Trading in Stamford, CT... 

So for now, the argument goes, there are better safe havens available to investors than the U.S. currency.

Even on individual days when events have sent a scare through the financial markets, the dollar hasn't benefited.

On January 25, when the protests in Egypt first flared up, the euro advanced more than two cents to almost $1.39.

This contrasts with other episodes of flight-to-safety currency buying in the past. During the 2008 global financial crisis, the dollar rose by roughly +24%.

Analysts at BCA Research also point out that some investors also are looking to gold as a more appealing safe-haven investment. "We would agree with this assessment," the analysts wrote.

Gold rose +5.7% in February, its biggest monthly gain since April 2010. With investors increasingly wary of the ability of the U.S. to solve its fiscal problems and the Fed perceived to be "printing dollars" as part of its quantitative-easing strategy to support the economy, there's less confidence that the U.S. dollar is "safe" in the sense, Mr. Borthwick says.

"It's the knee-jerk reaction that matters," he said. "Nowadays the knee-jerk reaction is buy euros and not to buy dollars. The mindset of buying euros is a complete switch."

Source: Wall Street Journal