USD safe haven status under pressure – Rabobank

The US dollar's role as a global safe haven is being challenged amid rising budget deficits and trade tensions. As investor confidence wavers, traditional havens like the Swiss franc and Japanese yen are gaining ground, signaling a broader retreat from US assets, Rabobank's FX analyst Jane Foley reports.

Tariff fears shake confidence in the USD

"The inability of the US Treasury market and the USD to function as safe havens over the past week has upended market norms and undermined the benefits to the US of ‘exceptionalism.’ If the cost of borrowing for the US Treasury continues to rise, the huge size of the budget deficit could start to matter in a way that it has not before. Last year, the US budget deficit stood at 6.4% of GDP."

"The USD’s dominance within the global payments system suggests a surge in demand for the greenback may still occur if investors start to worry about a credit event in the market. For now, however, the story that appears to be dominating flows is the fear that the positive growth outlook for corporate America has come to an abrupt halt under the weight of tariff news. These fears are mingling with concerns that Trump’s aggressive isolationist policies has damaged the country’s reputation."

"While the failure of the USD to behave as a safe haven in times of turmoil is unusual, the CHF and the JPY have been displaying text-book behaviour. While the haven quality of the greenback is built around its dominance as an invoicing and reserve currency, the CHF and the JPY derive strength from the tendency of investors to bring money home when uncertainty spikes. Both currencies are associated with current account surplus countries."