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Dollar’s Best Week Since April Shows It Still Has Haven Appeal

Dollar’s Nascent Revival Shows Value as Haven Currency of Choice

Dollar’s Best Week Since April Shows It Still Has Haven Appeal
A dollar sign bike rack, designed by David Byrne, stands surrounded by scaffolding and construction material along Wall Street in New York, U.S., on Monday, July 20, 2020. U.S. stocks fluctuated in light trading as investors are keeping an eye on Washington, where lawmakers will begin hammering out a rescue package to replace some of the expiring benefits earlier versions contained. Photographer: Michael Nagle/Bloomberg

A nascent revival in the dollar, after a summer of predictions about its demise, is highlighting why it’s still the ultimate haven currency for some investors.

After abandoning the greenback due to the Federal Reserve’s accommodative policy, traders are piling back in, leading to a squeeze of short positions. Liquidity, yield advantage and a lack of alternatives have helped to rekindle interest just as the U.S. starts to get a handle on the coronavirus pandemic in some places.

The Bloomberg Dollar Spot Index is poised to climb about 2.2% this week, the biggest five-day advance since April. Technicals suggest more gains are in the pipeline. The gauge had dropped more than 10% from its March highs to this year’s low in September, as hedge funds increasingly turned bearish on the dollar.

“The dollar is the safe haven of choice until we get new information on the vaccine, earnings, election and stimulus,” said Thomas J. Hayes, chairman of hedge fund Great Hill Capital LLC in New York. “Until then, the dollar is likely to have bottomed in the short term.”

Adding to investor concerns is data showing record new coronavirus cases in Europe and on Friday, the U.K. added London to its watch list of potential pandemic hot spots. That’s crimping optimism that economic growth in Europe will materially outpace that of the U.S.

“There’s been a clear erosion of the idea that Europe was ‘doing better’ than the U.S.,” said Kit Juckes, chief currency strategist at Societe Generale. Consensus growth differentials have “moved in the U.S.’s favor.”

Still, history cautions that a further advance in the greenback is far from certain. The U.S. currency also rallied in June but quickly gave back its gains as concerns about the global economic outlook receded.

The U.S. Federal Reserve’s lower-for-longer rates strategy is also likely to “put pressure on the dollar,” Quentin Fitzsimmons, portfolio manager at T. Rowe Price, wrote in a note.

Here’s a look at the dollar’s advantages in retaining its status as the supreme haven currency:

Yields

While futures indicate the Fed will keep the policy rate near zero at least until the end of next year, that isn’t as dovish as the negative-rate policy adopted by the European Central Bank and the Bank of Japan.

Dollar’s Best Week Since April Shows It Still Has Haven Appeal

At about 0.2%, the greenback’s three-month interest rate is the highest among Group-of-10 currencies after the New Zealand dollar, according to data compiled by Bloomberg. The dollar is expected to take pole position if the Reserve Bank of New Zealand goes ahead with a plan to deploy sub-zero rates to support growth.

Lack of Better Alternatives

A dearth of alternatives is another factor in the dollar’s favor. Gold, which has gained almost 20% since end-March to outperform the greenback, offers no yield and, in some cases, costs money for storage.

Dollar’s Best Week Since April Shows It Still Has Haven Appeal

The yen is another traditional haven, but a collapse of its positive correlation with equity volatility suggests that this status is weakening.

Liquidity

The liquidity factor also supports the greenback. The currency’s daily average turnover is five times that of the yen’s and more than twice that of the euro, according to a report from the Bank for International Settlements in April 2019.

Dollar’s Best Week Since April Shows It Still Has Haven Appeal

During the height of the coronavirus pandemic in March, a rush for the dollar triggered a spike in the greenback and a surge in its borrowing costs in foreign-exchange swap markets. That in turn prompted the Fed to boost dollar supply in cooperation with other central banks.

“There’s still a great deal of confidence in the U.S. dollar being the go-to currency when markets become very volatile,” said Tai Hui, chief Asia market strategist at JPMorgan Asset Management. “A lot of investors are just being ready for a period of increased volatility which drives the dollar stronger.”

©2020 Bloomberg L.P.