The world reckons with a risky dollar
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Illustration: Lindsey Bailey/Axios
The dollar smile — the longstanding dynamic where the dollar would rally in good times and bad — has been turned upside down.
Why it matters: The U.S. is no longer a safe haven. In fact, it's the country from which risk capital is now fleeing in times of turmoil.
The big picture: Ever since the global financial crisis of 2008 to 2009, market strategists have tended to look at various different assets through an "RO/RO" lens.
- Times of bullish greed are viewed as "risk on," which means buying equities and credit. Times of bearish fear are seen as "risk off," which means buying Treasuries and the dollar (which, in practice, generally means buying very short-term Treasury bills).
- This time around, however, "risk off" days have seen sharp declines in Treasuries and the dollar, with those assets rising only on days when the stock market goes up. In other words, the dollar is now acting as a risk asset, rather than playing its normal role of safe haven.
Between the lines: "Abrupt and unilateral policy changes have shaken global confidence in American economic and security leadership, and US assets are paying the price," former U.S. Mint director Philip Diehl tells Axios, adding that fearful investors want to "sell the USA."
- Diehl, who is now president of the U.S. Money Reserve, a precious metals company, sees a "rush to gold for protection."
- That seems to be borne out in the price action for gold, which touched an all-time high just over $3,500 on Monday, up more than 25% this year.
Where it stands: The dollar has lost its traditional "safe-haven bid," JPMorgan analysts wrote in a research note earlier this month, adding that "there is a broader risk premium being baked into U.S. assets generally."
- Making matters worse are worries about tariff-induced U.S. inflation.
- Currencies are valued in very large part according to their "real yields," the interest rate in that currency minus the inflation rate. As U.S. inflation estimates rise, real yields fall, and the dollar becomes less attractive.
The big picture: For years investors had an "automatic reflex" to buy dollars and Treasuries in time of turmoil, Stephane Lintner, the CEO of Jiko, a banking platform that provides direct access to U.S. Treasury bills, tells Axios. "I think we've lost that."
- "Investors stopped treating the dollar as a flight to safety currency and started treating it as a risk currency, a risk asset," adds Steve Kamin, a former Federal Reserve economist now at the American Enterprise Institute.
- "That goes for Treasuries, too," says Kamin, who recently published an article headlined "Dark days for the less-mighty dollar."
Follow the money: It's not clear whether any other asset has really replaced the dollar as the beneficiary of the safe-haven trade.
- Gold, Swiss francs, and even bitcoin have sometimes (but not always) seen a bid on down days for the market, but all of them are still small enough in size that a tiny proportion of dollar outflows can move them significantly.
The bottom line: The dollar might not be safe any more, but there's nowhere else that's obviously safer.
