If you have ever traded or been involved in the financial markets, then you must have heard that during tough financial times, the U.S. dollar (USD) is considered to be a ‘safe haven’ currency.
Giving the greenback this title started during the financial crisis and at the time, due to the market volatility, global traders would sell their risky assets and then invest in the USD as well as U.S. Treasuries in order to protect themselves from the market volatility.
In the last couple of months, with the greenback strengthening, the idea of this single currency as a safe haven has been boosted. This was further indicated when we saw the USD rise to its highest level since 2002 against the Japanese yen (JPY) this week while the U.S. Dollar Index also continued to rally.
Interestingly, last year, a study of exchange rate data from 1986 to 2012 was done by German Bundesbank. The study found that the U.S. dollar (USD) as well as the Swiss franc (CHF) are considered to be ‘safe haven’ currencies. To be more specific, if you view each currency in isolation, when the global equity market returns drop, the exchange rates of these currencies increases.
Taking center stage is Alessio de Longis, a quantitative analyst and portfolio manager at Oppenheimer Funds who has stated that after doing some research, there is no evidence that investors turn to the USD or dollar based assets during times of financial crises.
Instead, de Longis showed that during financial volatility, U.S. investors are more likely to bring their dollars home. De Longis views this as more as a step of repatriation as opposed to turning to the greenback as safe haven asset.
To back up his findings, de Longis, who specializes in trading strategies for international bonds and forex, researched data from the Federal Reserve which focused on the sales and purchases of Treasury bonds in the U.S. from 1997, covering 7 highly volatile and stressful financial events.
Last month, this study was presented to the Society of Quantitative Analysts. To summarize, de Longis said that the safe haven theory is quite simple. It states that when the markets are volatile, investors tend to sell off their risky assets and then seek safety in Treasuries from the U.S. As a result, capital then flows from overseas and is then outperformed by the USD and by Treasuries. The end result is that the greenback is viewed as a ‘safe haven’ currency.
De Longis then tested this safe haven theory by viewing a series of risk aversion events such as the financial crisis in Asia in 1997, the default and Long-Term Capital demise in Russia in 1998 and more. The Fed data of fund flows between foreign and domestic investors was then divided. Interestingly, it was only during the 2012 financial crisis that foreign investors bought Treasuries at a greater rate. This came before Mario Draghi, European Central Bank President, promised to do all that was necessary to protect the euro (EUR).
Added to this, during all the financial crises researched, de Longis found that investors in the U.S. were more likely to buy or sell fewer foreign stocks and bonds. This was clearly evident during the first Greek bailout and the global financial crisis. De Longis explained that since U.S. investors were purchasing less or selling foreign assets, this helps to push the USD higher while also driving a rally in the Treasuries.
Also, de Longis found no evidence of an inflow of foreign investments into Treasuries which seems to put a big question mark regarding the USD as a safe haven currency.
Based on this, do you think the U.S. dollar can be viewed as a safe haven currency?
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