Global investors reconsider their faith in the dollar’s safe haven status – Commerzbank

The Federal Reserve finds itself in a tough spot as it navigates rising inflation and slowing growth. Traditional safe haven flows into the US dollar may falter, with investors eyeing alternatives like the Swiss franc and Japanese yen, Commerzbank's Head of FX and Commodity Research Ulrich Leuchtmann notes.

Dollar's safe haven status may be at risk

"That is the tricky thing about this kind of growth weakness, which is currently to be expected for the US: the Fed's reaction is hampered by the fact that it also has to keep inflation under control. It has to maneuver between the recession rock and the inflation hard place. This is a significant difference to 'normal' recession phases, in which the Fed was able to concentrate on one task."

"If it can't, a recession typically turns out to be more severe. And the recovery is slower. This should be kept in mind when thinking about the USD reactions. The US dollar has been a 'safe haven' mainly because the US has usually recovered from recessions faster than other major developed economies. This time it could be different."

"The rationale that makes them 'safe havens' still applies: because both the Swiss National Bank and the Bank of Japan are already keeping their key rates at low levels, their scope for interest rate cuts in the event of a global recession would be limited – and with it their ability to weaken their own currencies."