Dollar still a safe haven in trade war

HONG KONG: The United States might be the trigger for escalating trade tensions with China, but it turns out that its currency could still be the best place for global investors to find safety.

That’s because the conflict is unfolding alongside what could be an even more powerful dynamic: US monetary policy normalisation. An appreciating dollar, propelled by expectations for stepped-up Federal Reserve tightening, has hammered a wealth of markets since April, when benchmark 10-year Treasury yields first pricked through 3%.

That has left some traditional havens — like gold — less of a buy, while offering pockets of value — such as Australian equities — in areas investors might not typically have considered.

The ultimate refuge, investors and strategists say, is the greenback. Dollar-based money market funds are now offering rates of about 2%, a level above the yield on seven-year Treasuries as recently as last September.

“The US dollar is now the most popular safe-haven asset,” said Cheuk Wan Fan, head of investment strategy for Asia at HSBC Private Bank. For a premium, the bank is recommending dollar-denominated emerging market debt, where yields have climbed in response to Fed tightening.

President Donald Trump’s trade actions started unsettling investors in March, when he warned about imposing new tariffs on aluminium and steel imports, and investors have had several rounds of escalating tensions with China to gauge how assets respond. One of the key observations analysts have made so far is that a trio of typical havens haven’t been doing so well.

Gold, a haven for millennia in times of turmoil, hasn’t been so hot the past three months, falling more than 5%. The Japanese yen, often a safe harbour thanks to the country’s status as the world’s biggest net creditor, has dropped almost 3% in that period. The Swiss franc, another favourite for the cautious, is also down 3%.

Behind the declines of all three has been the appreciation of the dollar, up more than 4% as measured by the Bloomberg Dollar Spot index.

The acceleration in Fed normalisation also played a role in the declines, with the US central bank rolling off $40 billion of its bond holdings a month at the current pace, and anticipating another half point in rate increases this year. While the monetary-policy outlook has implications for Treasuries, they are still seen by some as a buffer if global equities get roiled by fears that a trade war will damage global growth.

“They are a safe haven even when shocks come from the United States,” Patrick Artus, chief economist at Natixis Securities, said of US government securities.