When consensus on the 'safe haven' characteristic breaks down – Commerzbank

In times of increasing 'geostrategic uncertainty', the US Dollar has recently been tending to weaken rather than strengthen. The more this price behavior of the US currency becomes apparent, the more it could intensify, Commerzbank's Head of FX and Commodity Research Ulrich Leuchtmann notes.

USD may be losing its 'safe haven' status

"'Safe haven' is a value in itself. A financial instrument (asset or currency) that has this characteristic promises performance precisely when performance is most needed. It is therefore particularly valuable. Not because of the expected amount, but because of the expected time profile of future returns. In reality, because return expectations are extremely uncertain, this is by far the more important dimension for evaluating a financial instrument."

"To function as a 'safe haven,' a financial instrument needs certain fundamental characteristics. Most important, however, is that everyone must believe that everyone else sees it as a 'safe haven.' Only then can one expect the attractive time profile of returns to materialize in the future. This means that there is a risk of a self-reinforcing process. If market participants lose faith that the consensus on the dollar's safe haven status will continue, then this consensus will indeed collapse. And then we will see accelerating USD weakness."

"It is not so unlikely that it can be ignored. Especially since yesterday was another day on which both US government bond yields rose and the dollar weakened. This means that the rise in yields was not a reflection of a flight to quality, but rather a consequence of investors demanding a higher risk premium to hold US government bonds. The other 'safe haven' financial instrument – the US T-note – has also been tarnished. No wonder, given the fiscal high-wire act that the US government is currently trying to push through Congress. The picture is therefore complete.”