Dollar Quietly Losing Status as Safe Haven During Crisis

Eric Blair
Activist Post

It used to be that during times of perceived global crisis institutional investors rushed into the dollar as a safe haven. U.S. Treasury bonds were once considered as good as gold when uncertainty gripped the world. However, it now seems that the weight of fundamentals have finally surpassed prevailing perceptions where the dollar is no longer king of crisis investing.

In October, 2010, the dollar reached a 5-month low against the Euro during the fierce debate leading up to the $600 billion quantitative easing by the Fed. Following the final passage of QE2 in early November, the mainstream media hyped it as victory and promptly pivoted to begin pounding out headlines about the Eurozone debt crisis. Almost immediately the dollar turned the corner against the Euro.

2-month Dollar/Euro Chart 2010

It was easy to predict such a turnaround because perception at the time was clearly driving the currencies, while fundamentals were largely ignored. As I pointed out in October:

The fundamentals suggest that it (the dollar) should be finished, but just as the world is about to declare it dead, miraculously a global storyline seems to emerge just when needed and foreign investors rush back in for ‘safety.’

And, indeed, investors flocked back into the dollar on the hyping of the Eurozone debt crisis 2.0. However, this cycle only lasted until the first week of January, 2011 where talk of the Euro crisis was noticeably absent from the headlines, and America’s financial woes once again took center stage.

Now, as the world is gripped by authentic crises with mass civil unrest in the Arab world, and the devastating earthquake/tsunami in Japan, large institutional investors are continuing to abandon the traditional safe-haven dollar.

Bloomberg reported last week that “Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., eliminated government-related debt from his flagship fund last month as the U.S. projected record budget deficits.”

Despite the global turmoil, the dollar hovers near its 52-week low on the Dollar Index. Perhaps the timing of these crises coinciding with American lawmakers threatening a government shutdown over its escalating debt has deterred investors from their normal behavior. Instead we are seeing far more money moving into commodities, as currencies and government debt are being increasingly exposed as unreliable.

The world seems to be finally realizing that commodities such as food staples and oil are the genuine currency of our society, and the only true safe haven during global uncertainty. In fact, it appears that the fiat U.S. dollar is actually measured by oil (and other vital commodities), not the other way around. As tangible and necessary resources, oil and food are now kings of the crisis.