The US dollar has traditionally been a safe haven. Analysts at Natixis seek to determine whether the USD still plays this safe-haven currency role when risk aversion is high nowadays, and what factors could have changed this role. They see that it has disappeared, at least against the euro, which can be explained by the sharp rise in US external debt, the decline in the dollar’s reserve currency role and the massive monetary expansion in the US.
Key quotes
“When risk aversion has become high, the dollar has traditionally played a safe-haven currency role, appreciating against the euro. A rise in risk aversion (1998, 2000-2001, 2008-2009, 2012, 2014, 2018-19) has led to an appreciation of the dollar against the euro. The dollar’s safe-haven role stems from the fact that when risk aversion is high (2008, 2012, 2014, 2018-19): Capital flows to the US from OECD countries, particularly from the Eurozone; but capital also flows to the US (the dollar) from emerging countries due to capital outflows.”
“The COVID-19 crisis has not given rise to a lasting appreciation of the dollar against the euro; the dollar’s appreciation against emerging currencies has been quite muted. This can be explained by: An economic reason, concern about the rising US external debt; a political reason, the end of dollar purchases by many countries (China, Russia, OPEC).”
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